Listed property: built for longevity
In this team insights Q&A, Global Property Equities portfolio managers Guy Barnard, Tim Gibson and Greg Kuhl discuss the evolution of the listed property sector and share their experience of investing in property stocks over the last 20 years. They also offer their views on how the sector may evolve.
![Guy Barnard, CFA](https://www.janushenderson.com/wp-content/uploads/sites/4/Headshot-thumbnail_Guy-Barnard.png?w=150")
![Tim Gibson](https://www.janushenderson.com/wp-content/uploads/sites/4/Gibson_Tim_150x150.png?w=150")
![Greg Kuhl, CFA](https://www.janushenderson.com/wp-content/uploads/sites/4/Kuhl_Greg_150x150.png?w=150")
7 minute read
Key takeaways:
- Listed real estate has evolved significantly over the last 20 years, maturing into an established asset class of more than US$2 trillion, with growth driven by non-traditional property sectors.
- Consistency of people, philosophy and process are important factors for a successful property strategy, as is the need to be dynamic and respond accordingly.
- Markets sometimes become detached from fundamentals, but in the long run they drive share price performance. Today, the team sees earnings growth, dividends, and the potential for re-ratings as the main drivers for the listed REITs sector.
Q: How different is the listed real estate investment trusts (REITs) markets today, compared to twenty years ago?
The market has matured significantly over the last 20 years, but the core reasons to invest in listed REITs, namely dividends and compounding earnings growth, remain the same.
Today the market is a lot larger. Back in 2004 it was just over US$500 billion, today it’s circa US$2 trillion, so certainly more liquid and more diversified in terms of sectors and geographies. The greatest change has been the expansion of REITs beyond the traditional core sectors of retail, office, industrial and residential with the creation of new REIT sectors, as the needs and usage of real estate evolve. Non-core REIT sectors such as cell towers, data centres, self-storage, lab space and student accommodation now make up over 60% of the index compared to just 15% back in 2005.1
So when we hear people say the sector doesn’t change, it does, albeit not overnight!
Now, it is these non-core sectors that are the engine of returns. These sectors have more competitive moats around their business as they require an operator to maximise efficiency and returns. We are fortunate that many of the very best companies in these areas can be found within listed REITs.
Q: What elements make a good property fund and a good fund manager?
Consistency of philosophy, people, and process. It may sound rather obvious, or even a little dull, but having a clear target means you have a better idea of what you want the outcome to be and having a greater chance of achieving it.
As a team working together for many years, our goal has always been to deliver consistent long-term outperformance for our clients. Central to this is a belief that the real estate sector and equity markets evolve over time, driven by pervasive long-term themes such as shifting demographics, digitalisation, sustainability and the convenience lifestyle.
We won’t always get it right of course, and the markets are very good at keeping you humble, but it’s important to remain anchored around your investment philosophy and process, and not be distracted by day-to-day market movements. Instead, we believe daily-traded stocks, which provide uninterrupted liquidity for investors, sometimes see unjustified movements in their stock prices relative to the intrinsic value of the underlying real estate. This provides plenty of opportunities for managers with a longer time horizon, as stock prices do ultimately converge with fundamentals.
Q: Has your strategy and philosophy changed much over the years?
Our philosophy is predicated on change. Over the last 20 years we’ve seen some seismic shifts in listed real estate. Our strategy has had to evolve with these changes. We think a key advantage is our dynamic process, which enables us to move with these changes and respond accordingly. An example of this would be our global portfolios’ exposure to retail over the last 20 years. This peaked at 50% in 2010 and fell to a low of 5% during COVID. We think there is a lot of wisdom in the words of John Maynard Keynes, “When the facts change, I change my mind – what do you do sir?”
Q: What are the biggest risks for listed property and how are your portfolios positioned to navigate these challenges?
Being in the listed space can be something of a double-edged sword. On the one hand we benefit from exposure to some of the highest quality real estate assets globally through a tax efficient REIT structure. On the other hand, as mentioned earlier, the liquidity this provides to clients means share prices can become detached from their underlying real estate fundamentals in the short term due to larger macroeconomic forces. This can be very frustrating, but is an important source of opportunity for patient investors.
Q: What has been the most challenging investment decision you have made, what was the outcome, and what did you learn from it?
This decision still gives us nightmares! Several years ago, we added exposure to Chinese property development companies on the basis that they were cheap, and fundamentals had bottomed. However, the government introduced a set of policies that negatively impacted the sector further.
The learning was simple. Stick to the philosophy and process and take our risk where we have the ability to create consistent value. Investing in off-benchmark positions without a natural hedge exposed the portfolio to stock-specific risk, but more importantly, macro risk. We did exit those positions, before they fell a lot further, but it was a small crumb of comfort!
Q: What are the biggest mistakes that investors can make when it comes to real estate?
Probably the same mistake that investors make with any investment – short-termism.
Our companies are the landlords of the global economy; if you believe in economic growth then you should have exposure to the asset class. It’s also important to be patient to allow real estate fundamentals to be reflected in share prices and remove shorter-term equity market noise.
Q: What piece of advice would you like to give your younger selves from 20 years ago?
Try not to worry so much. We would hate to think about how much time we’ve spent worrying about our portfolios over the years. In some ways, it’s only natural – it’s what we get out of bed to do every day. But like an unruly child, at times it wants to do its own thing. Trusting the process and believing in our convictions and experience would certainly have led to fewer grey hairs! To be fair, the 2008 Global Financial Crisis and COVID didn’t help either.
Q: What do you find the most exciting and also the most challenging about being a real estate fund manager ?
Very few jobs pay you to learn – being a fund manager does. Of course, it’s not without its challenges and frustrations, chief of which is when fundamentals seem not to matter and valuations gaps appear for extended periods of time. Private markets are good at taking advantage of these opportunities, but really we just hate to leave money on the table for clients.
Q: What’s on the horizon for the listed property sector in 2025, and in the next ten years?
In some ways it’s strange, we probably feel more confident talking about what might happen in the sector over the next ten years than the next 12 months. That’s because some exciting changes to the sector are underway, that will take years to play out. The path of these changes won’t be straight but some secular trends around ageing populations, consumer demand and digitalisation are easier to identify and take a view on, than those that are subject to higher uncertainty, like global macro trends and geopolitical tensions.
Having said that, we think the setup today for listed property is compelling. We see value in shares trading at wide discounts to realistic bottom-of-the-cycle asset values, presenting an opportunity for further stock re-pricing to boost underlying property returns. In a lower-growth environment, the importance of management, asset and balance sheet quality matters more.
We expect performance divergence across different property types over time, which will drive earnings growth and plays to our advantage as active managers. Finally, the backbone of returns over the last 20 years has been dividends. When added together, we think these outcomes will be what every investor will want for not just 2025, but hopefully for the next 20 years and beyond.
We very much look forward to investing together with our clients to achieve their objectives and goals, for many more years to come.
1 Source: Nareit, FTSE EPRA Nareit Global Real Estate Extended Index Series. Data as of 31 June, 2024.
Cash flow: the total amount of money flowing into the business is less than money going out. Often caused by poor cash management, it may impact a company in terms of repaying debt and other expenses, and ultimately could lead to business closure.
Competitive moat: refers to factors or characteristics that give a company a durable competitive advantage.
Dividend: a variable discretionary cash payment or additional shares paid from a company’s profits to reward shareholders.
Fundamentals: factors that contribute to the valuation of a security, such as a company’s earnings or the evaluation of its management team, as well as wider economic factors.
Liquidity: a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.
Natural hedge: a management strategy to minimise the potential for an investment or security to lose value or fall in price, by having positions in securities or assets that are negatively correlated.
Off-benchmark: active managers who stock pick may make “off benchmark” allocations to stocks or sectors with the aim of outperforming the benchmark index.
Stock re-rating: occurs when investors are willing to pay a higher price for shares, usually in anticipation of higher future earnings.
Stock-specific risk: risks that are attributed to the individual company, rather than the overall sector or market, for example a poor management team, operational efficiency, and financial structure.
IMPORTANT INFORMATION
REITs or Real Estate Investment Trusts invest in real estate, through direct ownership of property assets, property shares or mortgages. As they are listed on a stock exchange, REITs are usually highly liquid and trade like shares.
Real estate securities, including Real Estate Investment Trusts (REITs), are sensitive to changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, supply and demand, and the management skill and creditworthiness of the company. Additionally, REITs could fail to qualify for certain tax-benefits or registration exemptions which could produce adverse economic consequences.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund invests in real estate investment trusts (REITs) and other companies or funds engaged in property investment, which involve risks above those associated with investing directly in property. In particular, REITs may be subject to less strict regulation than the Fund itself and may experience greater volatility than their underlying assets.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
Specific risks
7 minute read
Key takeaways:
- Listed real estate has evolved significantly over the last 20 years, maturing into an established asset class of more than US$2 trillion, with growth driven by non-traditional property sectors.
- Consistency of people, philosophy and process are important factors for a successful property strategy, as is the need to be dynamic and respond accordingly.
- Markets sometimes become detached from fundamentals, but in the long run they drive share price performance. Today, the team sees earnings growth, dividends, and the potential for re-ratings as the main drivers for the listed REITs sector.
