Since starting the APN Asian REIT Fund in July 2011, one question we’ve certainly been asked on more than one occasion by professional advisers, shareholders and others is: why did we do it?
It’s a fair question. Consider the investment objectives of the Australian REIT Fund and its Asian counterpart: both aim to deliver lower-than-market volatility; both feature a high level of distributable income “equivalent to at least 110% of the average yield” of the relevant benchmark index; and both pay monthly income to investors with an investment timeframe of 5-7 years.
Both funds are also intimately connected through our 20-year property-for-income philosophy, a robust, time-tested approach that delivers a stable, monthly income at lower-than-market risk by focusing on the fundamental drivers of commercial property returns. That might sound dull but when it comes to investing our clients’ money for the long term, we’re okay with that label.
Given our investment philosophy and fund objectives, one might expect the current running yield and total returns from both funds to be similar. The table below shows that they are. It’s satisfying to see that our Australian-developed REIT investment process is working effectively for the Asian REIT Fund.
|Australian REIT Fund||Asian REIT Fund|
|Current running yield1||5.74%||4.83%|
|5 year total return per annum2||10.92%||14.34%|
|Total return since inception per annum3||14.01%||15.77%|
According to the ASX Share Ownership Study, just 13% of Australian investors held shares listed on an overseas exchange. Nor is that over-exposure – Australia represents less than 3% of global market capitalisation – addressed through the ownership of internationally-focussed managed funds. With just 10% of investors, including SMSFs and company structures, owning any managed funds at all outside of superannuation, the percentage investing overseas through a managed fund must be tiny. Meanwhile, one-in-five share investors also owns Australian residential investment property (see Are you over-exposed to residential property?).
Perhaps you can see where this is heading. After 28 recession-free years the income of many investors is almost totally reliant on the health of the Australian economy, its share market and residential property sector.
For investors still working, perhaps with an outstanding mortgage, that dependence is even greater. If Australia’s economy tumbles, the income of many investors is going to go down with it. That’s a risk we think is worth insuring against. The question is how.
Enter the Asian REIT Fund, which offers Australian income investors all the benefits local listed property investors have come to depend on, but with smart diversification, focussed on the globalised cities of the world’s fastest growing region.
We’re the first to admit we may have launched the Asian REIT Fund ahead of its time. We don’t mind that, recognising that patience is required to take advantage of some of the best opportunities in commercial property. Having previously launched a number of funds with investment mandates which are new to the market, including Australia’s first self-storage property trust and one of Australia’s first petrol station funds, patience is our modus operandi.
Here we are, eight years from launch and slowly, the attractiveness of Asian commercial property is gaining traction. And not just with advisers; retail investors, especially those familiar with the high-quality shopping centres and office buildings in markets such as Singapore and Tokyo, where the majority of the fund is invested, are beginning to notice the fund’s attractions.
These global gateway cities appeal to investors in Australian property trusts that understand the impact on long term returns of location, population growth and land shortages. A global shift in wealth is underway towards Asia. Key Asian markets already feature some of the world’s best shopping centre assets, including Singapore’s very own Westfield.
As for Tokyo, it’s the world’s biggest office market and, as Pete Morrissey explained in Why would anyone invest in Japan?, unlike the rest of the country enjoys a growing local economy. It’s also in the midst of a huge tourism boom. By 2020, the country aims to have 40 million visitors a year, almost all of whom will visit Tokyo. Such are the benefits of the huge growth in Asia’s middle class, which now numbers around 1.5 billion, Asia’s hub cities are catching the eye of global capital.
It all adds up to a powerful argument for yield-focused investors to diversify away from an over-dependence on Australia as a source of income, towards Asia.
Asian REITs, unlike their Australian equivalents, are also generally restricted from property development activities, which lowers their risk profile. Gearing is also restricted, which should please local property trust investors that fell victim to the excesses of the sector prior to the global financial crisis.
The Asian REIT sector is experiencing remarkable growth and is far less concentrated than it is in Australia, where a few big names dominate, and. The fact that Asian REITs are mandated to pay out more than 90% of their income adds to their attraction, especially for income-oriented investors.
From a standing start more than 18 years ago when Japan established a REIT market, the Asian REIT sector today has swelled to a combined market capitalisation of $429 billion4. That dwarfs the local AREIT market with a market cap of $133 billion4. Performance has been impressive, too. The APN Asian REIT fund has returned 15.77% p.a.3 since its inception in 2011, putting it ahead of European and US REIT markets but also ahead of Asian and Australian equities.
There’s no doubt this story is making inroads with professional advisers and investors however ‘relevance’ takes time. It was only in July 2016 that the REIT sector as a whole was given its own stock market classification. We’re confident that listed Asian commercial real estate will become even more attractive to investors around the world. As a case in point, earlier this year one of the world’s largest and fastest growing economies – India – successfully launched the country’s first REIT. The Indian market, with its swath of commercial real estate, is no doubt going to gain share and relevance in the global REIT market as more REITs come to market there.
Slowly, advisers and investors in Australian are waking up to the opportunity. The APN Asian REIT Fund, at a running yield of 4.83%1, adds geographic (and hence currency) diversification and potentially higher capital growth over the long term, to an investor’s property investment portfolio. This yield is especially appealing in the current interest rate environment that we find ourselves in. At APN we are prepared to take long term views and one such view is on the future growth potential of Asia as a region – hence the development of the Asian REIT Fund which we continue to believe offers investors a particularly attractive option to access the region with its growth opportunity, with the backing of real assets and a stable income stream.