Treading a path to Asian property

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SEB Asset Management’s Thomas Körfgen sees strong income and good prospects from listed Asian property funds.

SEB Asset Management has launched a vehicle investing in Asia-Pacific real estate investment trusts (Reits), to give investors liquid access to an inherently illiquid asset, and income, in some of the world’s fastest-growing economies.

Exposure to growth will be a welcome change to growth-starved European investors. The vehicle’s 6.8% gross dividend yield aids an income-poor market; and daily redemptions are a contrast to problems among some unlisted property products.SEB invests more than €2bn in Asia-Pacific property, including direct investments.

The four-member team on SEB Asia Pacific Reit sits in Singapore and Frankfurt, and is led by Thomas Körfgen, head of real estate equities. The fund’s manager is Julian Mittag. Their €91.5bn Asian Reit universe is growing. Reits made 27% of all Asia-Pacific property purchases, by value, early last year.

Attractive returns

Körfgen (pictured) believes gross distribution returns of about 7% are currently possible at the portfolio level. Reit investors benefit from income as Reits must distribute most of their net income as dividends.

“This provides a new attractive alternative to supplement traditionally bond-heavy portfolios, in particular for investors such as institutions, foundations, or family offices with a strong preference for high ordinary income,” Körfgen says.

Yield from SEB’s product is above the Bloomberg Asian REIT excluding Australia index, and above major ­countries’ ten-year debt. Asian Reits traded at an average discount to NAV of 12.6% in March, compared to the 5% discount globally. Both compared well with the global 2% premium since 2006.

Andreas Bickel, head of asset allocation and advisory with Rothschild Wealth Management in Switzerland, says: “Our framework is showing a moderately positive ­valuation picture for real estate globally. Wwe recently raised our allocations to real estate in the cyclical asset allocations that form the framework for our clients’ ­portfolios.

“For a euro mid-risk mandate, we have moved up from a 3% to a 5% position. We believe this is a more sensible and meaningful allocation to the asset class, and one we will continue to adjust as the outlook evolves.”

SEB AM’s Ucits-compliant product has quantitative and qualitative screens to select Reits for investment, based on risk/return profile, as well as experienced management and acceptable corporate governance. Its Reits screening includes interest rate coverage (of at least 2.5 times), loan to value (of under 50%), dividend yields (exceeding 5%), price to book (under 1.2 times at portfolio level), and an overall proprietary ‘risk measure’.

Other factors considered include five-year dividend and rent growth, occupancy rates, weighted average lease expiry and short-term refinancing needs.

“Interest coverage on average [in SEB Asia Pacific Reit] it is five to six times, which means interest rates could increase by factor of more than five before companies [in them] could have problems, or they could increase their debt by a factor of five,” Bickel says.

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