It might seem odd to launch a new REIT fund in the midst of a global pandemic, especially one that has hastened the shift to online retail and raised questions over the future of the office (you can read our views on these issues here and here).

Having long specialised in meeting the needs of investors seeking higher, stable income at lower relative risk, our long-held “property for income” philosophy is the driver behind us launching a new Global REIT Income Fund.  This is a natural extension of our domestic and Asian REIT investment capabilities developed over 23 years.

Whilst the timing of the launch might be seen as challenging, it’s also full of opportunity. We believe the current market conditions suit our active, income-focused approach and present an attractive entry point for long term investors.

When it comes to commercial property, the COVID-19 pandemic has highlighted compelling reasons to invest into select global real estate markets and sectors likely to benefit from accelerating structural trends.

For investors in search of a relatively high income without excessive risk at a time of record-low interest rates, we believe there’s no better time to launch the fund, for the four following reasons.

1.  Relatively high, defensive income

The APN Global REIT Income Fund presents a unique offering in the market by focussing on recurring rental income generated from high quality real estate assets across a diverse range of property sectors.

With interest rates at record lows, what commercial property investors call “the spread” – the difference between the long-term bond yield and the yield on commercial property – has rarely been higher. Compared with other investment alternatives, whilst acknowledging that different strategies bear different risk profiles, global REITs are attractive on a yield and valuation basis:

Global Investment Yield Comparison

Source: Bloomberg, Canstar, APN
*Average of CBA, ANZ, WBC and NAB 1-year term deposit rates at August 2020
**GPR 250 REIT Index
An investment in an APN fund should not be regarded as an alternative or substitute to a deposit with a bank or deposit-taking institution. There is a different return profile and additional risks associated with investing in an APN fund compared to such a deposit.

The relatively high income generated from global REITs provides a lower-risk avenue to access the variable earnings of global sovereign and corporate tenants. Essentially, this boils down to the lease contract; the simple fact that commercial property landlords have priority to receive rental income before shareholders receive dividends.

For investors seeking stable income and a desire for global exposure in their portfolios, commercial property is especially attractive. An investment in select REIT landlords can provide exposure to the contracted rent receipts paid directly by some of the most innovative companies globally which, in many cases, lease many types of commercial property, from office and logistics to data-centres and retail, to fulfil their core business.

We also expect the Fund’s broader ability to invest in preferred securities issued by REITs will help maximise the defensive income attributes of the fund while minimising return volatility, given their position ahead of common equity.

APN’s tried and tested approach focuses on those REITs that deliver sustainable, relatively high yields derived from passive rental receipts. Focusing on healthcare, data centres, life sciences, non-discretionary retail, office towers and the like, the Fund is able to deliver an attractive yield.

2.  A deeper and more diverse opportunity set

The Global REIT market, with a market capitalisation of ~AU$2.3 trillion, has multiple subsectors, including everything from dedicated REITs covering residential accommodation, mobile towers and data centres right through to healthcare, grocery and self-storage portfolios.

As the charts below show, there are REITs one can access around the globe, particularly in North America, offering exposure to sectors that are simply unavailable in Australia. Not only are many of the listed REITs invested in these property types attractively priced right now, the opportunity set is deep and diverse:

Number of REIT Stocks (approx)

Market Capitalisation (A$ millions)

Number of Properties (approx)

Source: Capital IQ, APN

The depth and diversity of the global REIT sector means attractively priced, growing REITs with defensive qualities are relatively easier to find.

This is a significant point. There is a lack of clarity around how offices and shopping centres will fare in a post-Covid world, expressed through their current share prices. This share price weakness is also evident in global REITs that have little to do with these sectors.

The depth and diversity of the global REIT sector allows us to uncover attractively-priced, high quality REITs. This helps us to maximise the Fund’s income, minimise risk and drive capital growth.

3.  Diversification benefits

APN’s Global REIT Income Fund adopts the same “property for income” approach that has defined our company since launching our first property securities fund in 1998. But the global nature of the Fund offers additional advantages.

Australian investors are typically over-exposed to Australian stocks. The ASX/Deloitte 2017 Australian Investor Study revealed that 75% of investors hold only Australian shares. For income investors especially, this entails substantial risk. Diversifying your portfolio with an international product like the APN Global REIT Income Fund can help manage the risk of an over-reliance on the local market. Seeded with APN Property Group capital, the APN Global REIT Income Fund currently allocates the portfolio to North America, Europe and Asia Pacific.

Not only does a more geographically-diversified investment base reduce the risk to your overall portfolio, it also delivers the potential for more profitable opportunities and offers protection against market cycles that vary from country-to-country, helping to stabilise income distributions.

4.  Exposure to accelerating global trends

Important global trends will continue to develop and in many cases are now likely to accelerate. By investing into select global REITs at attractive valuations, the Fund will aim to provide exposure to these changing winds while remaining underpinned by its income and risk objectives.

Covid has accelerated some powerful global trends affecting commercial property. As we noted in The APN Asian REIT Fund Comes of Age article with ever more users online, the reliance on digital tools for online working, learning and shopping has led to a surge in demand for data centres.

Industrial REITs that service urban populations through the fulfilment and stockpiling of goods are another example. Growing online retail is driving often large-scale and heavily automated facilities or infill warehouses ever closer to consumers. Across the globe, landlords are reporting that greater levels of inventory are likely to be held locally in order to mitigate future supply chain disruption, supporting the need for more space. The APN Global REIT Income Fund offers a rich and deep exposure to both these accelerating trends.

As for the office sector, since removing our white-collars in mid-March to work from home (WFH), contemplating the future of commercial office buildings has become a topic of general conversation. As we wrote in Has Covid19 changed the commercial office investment case forever?, the performance of the sector will ultimately be determined by the underlying resilience or otherwise of the tenant’s business.

The Fund’s ability to gain exposure to office properties not subject to this constraint is particularly attractive. Properties leased to governments, federal agencies and life-sciences companies where staff are physically unable to WFH due to a combination of security requirements and the need to work with highly specialised equipment offer protections against these risks.

Why we’re excited about this opportunity

We’re excited to launch the APN Global REIT Income Fund, developed to target a higher income together with lower relative risk compared to investing in the Global REIT Index. Our mandate aims to achieve this by focusing on high quality REITs and their preferred securities, placing stable income generation at its core.

This exemplifies our concentration on income and differentiates it from others that follow the Index or favour relatively higher-risk real estate operating companies and property developers.

The APN Global REIT Income Fund delivers access to income returns from a world of commercial property, available to investors through an actively managed portfolio of global property REITs. It offers exposure to the developed markets of North America, Europe and Asia Pacific, focused on those regions and sectors where local fundamentals and accelerating structural trends are driving the best prospects for sustained rental growth and long-term value creation.

As with our existing AREIT and Asian REIT products, the Fund will pay a monthly distribution in line with our “property for income” philosophy, based on our successful track record of investing in the Australian and Asian REIT markets over more than two decades. Collectively, our team of portfolio managers, located in Australia and North America, have 75 years of investment experience.

We’re pleased to be launching The APN Global REIT Income Fund and look forward to welcoming existing and new clients to invest alongside us.

This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for Review, our monthly email newsletter.