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FirstChoice WS Inv - First Sentier WS Global Property Securities

How REIT Investors Can Drive Decarbonisation

About this Fund

Fund Detail

PDS https://informedinvestor.com.au/view/pds/100078-2024-06-15-02:27.pdf
FUND MANAGER First Sentier Investors
ASX Code
APIR FSF0454AU
ASSET CLASS PROPERTY
INVESTMENT STYLE The option invests primarily in property securities sourced from around the world.
INVESTMENT PROFILE To maximise total returns to the investor and to outperform the Benchmark before fees and taxes.
CURRENCY MANAGEMENT Hedged
INCEPTION DATE 11-05-2004
BENCHMARK FTSE EPRA/NAREIT Developed Index, hedged to Australian dollars over rolling three year periods before fees and taxes
FUND SIZE FTSE EPRA/NAREIT Developed Index, hedged to Australian dollars over rolling three year periods before fees and taxes
DISTRIBUTION FREQUENCY Half-yearly
NO. OF HOLDINGS 30-50
FEES 1.02% p.a.
STRUCTURE

Benefits

Benefits

Investment philosophy

Incorporating asset-specific and region-specific micro and macroeconomic forecasts into our security valuation models. We believe that property fundamentals are largely driven by local property factors, which is why we have placed members of the team in the major regions of the world - Asia Pacific, UK/Europe and the United States of America

Investment strategy

Bottom-up assessment of property companies is gained through extensive company visits and asset inspection. We also consider potential holdings based on value, asset quality, management quality, financial leverage.

Our Global Property Securities team combines specialised knowledge with a globally consistent, disciplined investment strategy that is solely focussed on property securities. Team members are based across the world's major property markets, including New York, London and Singapore. We believe that on-the-ground assessment is essential to getting property stock selection decisions right. The team also uses input and expertise from other investment teams within CFSGAM. 

We employ an active, bottom-up security selection process that aims to exploit market inefficiencies. We believe that best investment ideas should drive portfolio creation, and our global property funds are based on total returns, not just yield. We take a pragmatic approach to investing in property and seek to exploit market inefficiencies by combining attractive value with superior quality characteristics.


RISK LEVEL 4
INVESTOR SUITABILITY

This product is likely to be appropriate for a consumer seeking capital growth to be used as a core component within a 
portfolio where the consumer has a minimum 7 year investment timeframe, a high to very high risk/return profile and daily 
access to capital.

Risks

Title
Detail

Key Features

Overview

Investors looking for exposure to property markets are faced with the choice of investing in direct property, or in property securities. Property securities are the shares of companies, or Real Estate Investment Trusts (REITs), which invest in property.

These are quoted companies which own and manage commercial or residential property assets.

They are designed to offer investors income and capital appreciation from rented property and/or property development. Investment grade property assets include main Central Business District office buildings; suburban office buildings; super-regional, regional, sub-regional and convenience shopping centres; high tech, traditional and logistical warehousing; hotels, health care, self-storage and retirement assets as well as residential investment and development.

REITs have a simple and transparent tax structure. Earnings derived from property assets held within a REIT for investment do not incur company income tax, provided at least 90% of the REIT's net profits are distributed to unit holders (the required distribution of profits does differ by jurisdiction). As a result, REITs tend to pay high dividend yields to investors. From an investor's perspective, the trust structure emulates direct ownership of the assets themselves. Underlying property values and returns are reflected in REIT share prices over time, offering diversification from other asset classes. By allocating a portion of their assets to global property securities, investors can achieve greater diversification by stock, sector and geography than by investing in direct property.

The investment case for Global Property Securities Stable cash flows from fixed assets.

The majority of the cash flow generated by REITs are derived from contracted rental income streams from high quality buildings, making them very stable. This generally results in a secure dividend stream for investors. Additionally and more broadly speaking, with the current high land and construction costs, new development is expensive. Combined with an arduous development approval process in many jurisdictions, the barriers to entry make it difficult to significantly increase supply. Consequently, there are fewer risks to existing cash flows.

Inflation protection

Income generated by property assets is an effective inflationary hedge. This can be achieved both indirectly, through increased demand for rental space, and explicitly, where the leases contain annual inflationary escalators.

Capital intensive assets

Property assets can require a lot of capital to be spent on them through a cycle to keep them well maintained. This keeps the buildings competitive, enabling them to attract higher rents and achieve consistently high occupancy rates. Publicly traded REITs' and REOCs' (Real Estate Operating Companies) use of capital markets can provide access to a very competitive cost of capital.

Diversification

The global property securities asset class is well diversified by asset, sector and geography. The low level of correlation both within the asset class as well as with other asset classes has the potential to improve a portfolio's overall risk/return profile.

Access and liquidity

Investing in property securities provides access to the benefits of the asset class to a range of investors, not just those who can afford to take direct exposure. The other important consideration is that a property securities portfolio invests in property companies which are traded daily, unlike investing in direct property where transactions can be costly and take a long time to complete. Direct property investors often have to wait to buy assets and generate returns, or wait to sell and generate cash.

Our Approach To investing

We believe that real estate security returns are driven by a combination of local real estate fundamentals and broader capital market conditions. Due to the fundamentally localised nature of real estate, asset class returns across different regions have historically been characterised by low levels of correlation, and by a lack of uniformity. This phenomenon can lead to large pricing anomalies, presenting opportunities to generate excess returns through efficient capital allocation, and active regional and stock selection.


Mandate

Investment Process

Defined Screen

A defined screen focusing on market/sector risk, liquidity, financial leverage and quality.

Fundamental Research

Detailed industry research, 500+ company visits per year.

Relative Valuation Table

DCF, NAV primary valuation methods. Also FFO, EV/EBITDA, yield.

Security Selection

Initial portfolio construction based on relative value and total return dispersion.

Portfolio Construction

Liquidity-adjusted portfolio construction outcomes.

Negative Screen

Negative screen to mitigate absolute concentration risks.

Key differentiators

Four main points to differentiate our investment style and set us apart from our competitors:

  • On-the-ground approach We believe employing specialist property investors in each region is the most effective way to manage a global property securities portfolio. As such, the team's highly experienced regional specialists are based across the world's major property markets: Asia Pacific, Europe and the US to provide on the ground research and knowledge to assess the risks and opportunities of the asset class.
  • Highly defined, globally consistent investment process We use a highly defined, globally consistent investment process which incorporates proprietary forecasting and valuation methodologies, risk adjusted relative valuations and very disciplined portfolio construction. There is an over-riding focus on absolute and relative risk. The targeted outcome is to allocate capital efficiently through thorough, bottom up research and stock selection, rather than to simply replicate an index.
  • Specialist approach Investment team members - the majority of whom are very senior and experienced industry investment specialists - are focused solely on investing in publicly traded real estate securities. They have a full understanding of stock specific endogenous risks, the wider real estate market and the macroeconomic conditions which can affect them.
  • Environmental, Social and Governance (ESG) CFSGAM has integrated ESG across all investment processes. We believe the consideration of ESG issues will lead to better risk return outcomes, which will ultimately improve long-term returns for clients. ESG issues are addressed using a two pronged approach. Firstly, ESG considerations have been implemented into the investment process as a variable in the initial screen to determine the defined investible universe, and as a variable in determining the Beta in the Capital Asset Pricing Model for the NPV valuation methodology. Secondly, the team is a firm believer in investor rights and takes a pro-active stance on ESG issues, especially with regards to corporate governance.