Property investors need to select active managers for best performance in 2007 and beyond.
Since 2000, Australia’s unlisted commercial property investment sector has enjoyed a major renaissance, going from approx $4billion in funds invested in 2000, to in excess of $19 billion today.
But now it seems the sector’s success has created its own challenge for investors, with the weight of new money driving asset prices up, but yields down.
According to John McBain, a 15+ year property veteran and managing director of Century Funds Management, this is why maximizing total returns, not just yield, from commercial property is vital – and why investors need to consider choosing active investment managers when investing their commercial property money.
Commercial property asset yields are generally agreed to have peaked during the current cycle in 2003/2004 at around 9-10%, and have since fallen to around 6-7%.
“I think it’s fair to say that a lot of the people who only came to unlisted commercial property investment in the past 3-4 years – and did so primarily for its yields – are starting to rediscover the knowledge that long-term investors in the sector have largely always followed,” says McBain.
“That is that, across the full cycle, commercial property is very good for yield – but a key strength during times of lower yields is the ability to maximize capital growth through actively managing the assets,” Mr McBain said.
McBain’s company, Century Funds Management, is a Sydney-based firm that specializes in actively managing unlisted commercial property investments in Australia’s key population centres.
Established in 1998, Century manages approx $450 million and boasts an impressive performance history that offers some validation to McBain’s position.
According to independent researcher Lonsec, Century delivered an average total return of 16.8% since January 2000, compared to an 11.5% pa total return by the benchmark Mercer Unlisted Index, over the same period.
(p. 11 Lonsec Limited, Dec 2005 report – Century Funds Management Balanced Fund No.1).
These are returns posted both pre- and post- the peak in the yield cycle, reflecting Century’s focus on delivering higher performance across the full investment cycle.
McBain says: “Investors also are starting to see that yield is largely a function of the property market and macroeconomic trends, whereas the asset growth is the facet that the investment manager can have greatest influence on.”
Mr McBain says the passive approach to commercial property investment management would always be a valid form of investment management across all asset classes.
But active management was particularly appropriate in the case of commercial property.
“The practical fact is that an active equity manager can’t get in and run the business they buy shares in – so for all the extra work they do in understanding the stocks they buy – they have almost no additional control from which to drive performance.”
“Compare that with a commercial property manager – who can actually reposition the building, pick the trends for what industries to configure the fit-out to in that suburb etc.”
“Realistically, it’s that ability to do real ‘bottom-up’ management of the assets that means active management approaches make more sense in commercial property than in any other asset class.”
McBain says this is a vital distinction to make between property and equity investment.
“For years, the equity managers have argued about whether active managers outperform enough after fees.”
“But in the case of property, the difference is that there is far greater control over the asset invested in – and so there is far greater potential for us to add-value through intensive active management of each portfolio and each asset.”
