The freeze on redemptions from Australian mortgage funds was extended this month to include the Mirvac AQUA stable, consisting of the Income Fund ($54m), Enhanced Income Fund ($6m) and High Income Fund ($183m). While a fraction of the size of the billion dollar plus City Pacific First Mortgage Fund which suspended redemptions earlier in 2008, such moves by Mirvac AQUA add weight to a worrying trend where it is likely that the market will witness further mortgage funds suspend redemptions in the near future. As investors seek to redeem cash (en masse) in response to the current malaise, it would seem that fund size alone has not proven to provide investors with insurance against the suspension of redemption requests. It is perhaps at this time, where economic uncertainty is increasingly prevalent, that the value of independent research is at its most useful in assisting investors to navigate the troubled waters which seem to be increasingly choppy.
The tortoise and the hare
Markets in all forms invariably seek to anticipate future events. The severe, almost indiscriminate, beating that securities have taken this past financial year was largely due to the expectation that the near future was unlikely to be as rosy as the past. The listed property sector in particular had been excessively penalised due to the expectation of widespread asset-write downs and distribution cuts. However, where markets generally lead, property valuations tend to lag due to the requirement for factual market data (i.e. transactions) to substantiate opinions of value. As markets seek to forecast and are thus somewhat of a collective viewpoint illustrated through a price mechanism, the tendency to overshoot highs and undershoot lows is a trait that many with experience note. Investors may do well then to exercise caution in the face of seemingly firm re-valuations in the immediate future and to remain cognisant of value traps. The tendency to overshoot may however create value within isolated circumstances that has not been present for some time.
Carbon trading and property
With the federal government still to thrash out a definitive outline of its proposed carbon trading scheme, the commercial sector of the Australian economy can be thought to be in a position akin to that of a rabbit in a spotlight; uneasy and in imminent danger with a low probability of escaping completely unscathed. Such a scheme is likely to incentivise the construction and occupation of green buildings in addition to sustaining and promoting their value within the greater property universe. Those fund managers and developers already seeking to emphasise their green credentials may well be the early adopters of a phenomenon which is thought likely to move from the fringe to centre stage. Remaining cognisant of the risks and opportunities presented by the implementation of the scheme, may provide investors with the foresight to structure their portfolio in advance of likely market developments.
June 2008
Wild ride for emerging property fund managers
As turmoil continues to sweep through investment markets, PIR is moved to revisit comments we made in August 2007 concerning the performance of fund managers when markets change direction. When the market turns from bull to bear, the focus needs to shift to identification of those managers who are best positioned to maintain value, rather than create value. Equally, market downturns also tend to produce participants who aim to take advantage of potential mispricing as a key to their investment strategies.
PIR seeks to remind investors that under both scenarios, a re-evaluation of a manager’s strategies and experience is vital and caution needs to be taken when assessing a manager’s past history. Emerging fund management entities are all too often led by management teams who have not lived through true bear markets and have yet to prove themselves up to the task of making sound decisions under pressure. For those undertaking ‘vulture’ funds looking for value, core skills in how to distinguish real value form perceived value comes into play. All in all, closer examination of the skills of the managers in times of adversity needs to be sacrosanct.
Vanishing values?
As question marks start to appear on the book value of some real estate portfolios, investors are reminded that valuations done on an open market basis when market conditions were strong and the distressed sale values are potentially two very different numbers. Given the speed with which the global credit crisis has enveloped real estate markets and the fact that securitised real estate portfolios only tend to be valued (effectively marked to market) on rotation (most commonly every 1-3 years on a revolving basis), investors should be aware that the potential for current declared portfolio values to be overstated, is a very real possibility.
While PIR does not anticipate falls in real estate values to the extent witnessed in the US and UK markets, investors should be wary about relying too heavily on current book values of some real estate assets not marked to market in the past 9 months, particularly if they are on the block for divestment or supporting a thin LVR.
July 2008
Poor compliance in continuous disclosure by unlisted companies and funds
At a recent industry stakeholder liaison meeting the Australian Securities and Investments Commission (ASIC) advised it was observing poor compliance with the continuous disclosure obligations under the Corporations Act 2001 by a range of unlisted companies and managed investment schemes. While several issues were illuminated, of particular interest to PIR amongst the information that should be disclosed was reference to “Any rating applied by a rating agency to a disclosing entity, or securities of a disclosing entity, and any change to such a rating.”
Given the current turmoil in investment markets generally, PIR reminds all investors that ratings, particularly fund ratings in managed investment schemes, are usually a point in time snapshot and that product ratings need to be updated on a regular basis. Investors presented with opportunities should at least ask the product issuer if current ratings are available, and if not, why not. Likewise, investors already committed to investments should keep abreast of any changes to a fund’s rating to ensure that they remain comfortable with the risk parameters of their investment.
ASIC is undertaking research into non-compliance and will issue further guidelines reminding unlisted disclosing entities about their obligations under the Act, with transgressors likely to face enforcement action.
The consequences of selective investing
With deteriorating economic and investment environment conditions, investors are considering more carefully the nature of the underlying assets of the funds and vehicles into which they are investing and the risks associated therein. This elevation in selectiveness, while good (and probably overdue) does not come without its consequences.
As both business and consumer confidence sinks and the demand for and supply of credit shrinks, property development becomes less attractive. Not only does this impairment affect the developers, but also those who lend to the developers. With an industry reputation already polluted by the likes of Westpoint, the easing of investment flows into the lending entities (often raised through debentures or securitised mezzanine vehicles) can bring them to their knees as equity investment is their life blood. This then in turn affects those who have money invested as developments need to work through the lending book in order to repay investors. Without cashflow in, no lending margins can be made and the lending entity faces administration. This process, while favouring the entities with longer and stronger track records, is still somewhat indiscriminate and we are likely to see more of these entities in the headlines as they fold, Elderslie being the latest victim.
May 2008
ASIC’s Investor Research Report Findings
In late April, PIR noted the release of ASIC’s findings on research relating to Australian consumers’ understanding of investments and their levels of financial literacy. The results represent a somewhat worrying picture given the wide-ranging issues that have befallen investment markets and investors over the past 12 months alone. The survey of 1,200 investors and several focus groups covered a wide range of fundamentals, but of key interest to PIR was that while the concepts of risk and return were among the most important factors investors considered, only about half of those surveyed were able to select an appropriate choice from a multiple choice list of the ‘reasonable’ rate of return to expect from a fixed interest product over a ten-year period (such as debentures and some mortgage products). Even fewer investors were able to do this for other asset classes such as shares and property. Also, while over three quarters of investors had heard of ‘diversification’, over a third had difficulty applying the concept.
Despite being property specialists, PIR has long advocated that appropriate investment diversification is key to being able to avoid the majority of the pain caused by market slumps. Also, a key part of PIR’s ratings methodologies is the comparison of investments on a risk adjusted returns basis. Clearly, we hope that the outcome of ASIC’s survey will aid the regulator and other participants to devise a more effective transfer of knowledge to the investor community so as to enable people to make more informed choices.
Investing through advisors or directly – you still need research
Investors in managed investments should take note of the importance of having independent research available on such vehicles before deciding on whether or not to invest. A large amount of investment into such products is directed through financial planners and advisers, who generally need to have research available in order to be able to place a product on an ‘approved list’ for their clients. PIR is aware however that there are many instances where fund managers have products which are marketed to encourage the public to invest directly, effectively bypassing advisers and the requirements for independent research. Investors should be sure to ascertain that a product has independent research available from a reputable provider before committing to an investment decision, regardless of a fund manager’s size or track record.
April 2008
Disclosure and Transparency
Disclosure and transparency are critical for any AREIT intending to maintain the confidence of analysts and investors alike. Any undisclosed off-balance sheet derivatives for example are likely to be severely punished in this climate particularly if their subsequent disclosure results in negative news. This goes also for complex structures – the case so often in the past and now seen with the likes of Centro, Allco and MFS. Earnings streams which are seen as relatively secure will be rewarded under normal circumstances. This goes largely to the quality of the portfolio and the reliability of any corporate component (funds management fee flow for example is more reliable than development or transaction related fees or profits).
A-REITs vs Financials
Many A-REITs are now considered by many to be ‘financials’ rather than real estate products and as such are feeling the pain first as the systemic contagion is affecting financial stocks. It is a mistake however to tar all A-REITs with the same brush as they are materially different from most financials and most are significantly different from each other.
March 2008
Securitised Property Offers – Important Note
At a time when securitised property offers are scarce, it is vitally important that investors keep their wits about them when selecting which products into which they should invest and not select a syndicate/unlisted trust simply because of a dearth of alternatives. Maintaining an appropriate weighting to property can be problematic, but when selecting an illiquid fund, it is vital to ensure it is suitable to the investor’s return parameters and risk tolerances. It should always come with appropriate personalised investment advice and independent research.
Four Significant Characteristics of Troubled Listed Entities
Four significant characteristics common to the listed entities which have encountered troubles in recent times are very aggressive growth (particularly in fields new to them), heavy use of leverage, complex and opaque entity structures and sub-optimal disclosure. At this point in the cycle, investors should expect from managers - clarity of earnings streams and strategies, prudent capital management and appropriate earnings growth strategies.
