This time round we are looking at the Real Estate Investment Trust or REIT sector with views from both the company level and the professional investor level. I’m Leonora Walters (LW), a Financial Express reporter writing for Investegate.co.uk and Trustnet.com
I’m delighted to welcome our panel: Simon Melliss, finance director at Hammerson, Patrick Sumner, fund manager at Henderson Global Investors and Dave Butler, programme coordinator, Reita.
Q1 I’m going to kick off by asking you how you think UK REITs performed over their first nine months on the market?
Patrick Sumner: The UK property index is down about 34%. That doesn’t differentiate REITS from non REITS, but the REITS have probably underperformed the average by a little bit - not by too much because they account for something like 75% of the index. 34% seems like a lot but that’s the average of what they were up every year in the previous four years so they are giving back a certain amount of what they gained over the previous period.
Patrick Sumner
LW: Why would you say that REITS have underperformed their peers?
Patrick Sumner: The general investor had decided at the beginning of the year that there were better returns available in other parts of the market. He has seen the substantial gains that we talked about over the previous four years in the UK property index, probably sharing it to about 50% of the second half of 2006. As the general investor doesn’t have to be invested in real estate shares – it’s only 2% of the overall index – he will take out his money into other sectors. Fundamentally he is making a call that the party is over in the commercial property market in the UK which is not a scenario that we necessarily agree with.
Do you think that is a fair assessment?
Simon Melliss: I personally do not think it is really a REIT underperformance, I think what it is, as Patrick says, is that we have had a very good performance from property shares over three or four years and the reason why people decided to sell out was in anticipation of a decline in commercial property. So my view is that the stock market anticipated what’s never happened in the commercial property market. I don’t think it’s anything to do with the conversion to REITs except that in the last three or four months of the year there was a bit of euphoria that pushed stock prices up and came back in the first quarter. But I think that only explains part of that 34% decline.
Dave Butler: I think the other issue we need to take account of is that we are looking at a nine month period and property is a long-term investment. Any judgement based on nine months is bound to be short-term and does not take account of the whole picture - whether you look at it over five years or whether you are looking long-term. The other fact to be taken into account in judging the REITs market specifically is what else has happened. We have had some 70% of the total market cap of the real estate sector converting to REIT status. That has to be a positive thing if you are looking at it for the long-term. We just need to take a long-term view on it before rushing to judgments on the basis of nine months.
Q2 How has the performance of UK REITS been over the year in comparison to their international peers?
Patrick Sumner: REITs on the continent, i.e Europe excluding the UK, are down 15% so about half as much as the UK sector. Commercial property in France is down 10% - and this is mainly REITs. The US is down 5% so the UK isn’t the only area in negative territory. At the same time, however, Asia Pacific including Australia is up this year and some of the sectors which do have REITs like Singapore and Hong Kong are up really very strongly. But I think this is due to local liquidity, people’s enthusiasm for emerging markets and the strength of Asian economies generally.
Q3 What about your expectations regarding the level of REIT dividend payouts in this first year?
Simon Melliss: Most of the REITs have said that they will substantially increase their dividend payments this year essentially paying the tax that they’ve saved to their shareholders, so you have got a range of increases. But fundamentally there has been a significant shift in dividend payments.
Dave Butler: The other thing that you need to consider, taking a longer term view, is that there is essentially change in dividend policy. We are looking at a position where most REITs were looking for capital growth and relatively low income distributions - a position where we were operating in an income play area. Therefore we expect to see continuing growth in those latter dividends over time. And that again reflects what investors are looking for: if they are long-term investors like Patrick they can find predictable income streams going forward into the future.
Patrick Sumner: There’s an argument which hasn’t been resolved yet as to whether the UK property sector should be one that you invest in for income or one that you invest in for growth, or a combination of the two. In other REIT markets like the US and Australia, generally speaking people have been investing in them for income. But the UK is actually a low income higher growth sector, generally speaking, although relative to the rest of the world yields in the UK are low. This means it is actually quite difficult for the UK to pay out the sort of dividends – 4% or 4.5% - that you see from US REITs. So until the UK moves away from a net asset value and growth model towards a discounted dividend model, I think you will see lower yields in the UK, although they will rise from the current 2.6% yield to somewhere to the north of 3%.
Dave Butler: And I think that if you look at new propositions coming to market such as the local shopping REIT, yields might rise so investors should mark that as a good income play. Simon Melliss: Yes, but there will always be relatively secondary property sectors that have higher yields versus prime sectors that have lower yields and a higher growth rate.
Dave Butler: There is a fundamental issue for investors looking at the sector. What it is they are looking to get out of it; what’s the risk profile and what are their objectives in investment terms - are they income, are they capital or are they looking for a mixture of both? And that is something, as Patrick says, that is a debate within the property industry itself. There is also a debate among IFAs and their clients as to what they want out of these new vehicles, and it is a debate that will take some time to resolve.
Simon Melliss