Management changes needed to make property trusts more attractive

By Philip Macalister

Friday 24th March 2006

Listed property trusts in New Zealand would be more attractive to investors if their management was internal, rather than being contracted out to external companies, a visiting international expert says.

Karl Smith, who is responsible for Russell Investment's US$5.1 billion worth of real estate assets worldwide says the trend internationally, is towards internal management.

During his current visit to New Zealand, US-based Smith says he has picked up that there is tension in the sector over management issues.

When asked if internal management structures were better than external ones, Smith said: "Oh absolutely. It's a far better model."

The main concerns about external management are the level of fees paid as assets under management increases and potential conflicts of interest.

Smith says international property is a fast growing asset class around the world that investors are starting to embrace.

The concept of listed property trusts, or real estate investment trusts (REITs) as they are called in the US is spreading. While it started in the US and New Zealand and Australia were early adopters more countries in Asia and Europe were developing listed property markets.

Smith says investors should consider global property as an asset class that provides good returns, diversification and is a sector that will benefit from growth in global real estate securities.

He says that the FTSE global real estate index has risen (in US dollar terms) 15.4%, 30.8% and 17.2% in the one, three and five year periods respectively. This index has outperformed the MSCI global share index and the Citigroup world government bond index.

Looking forward he expects that REITs will generate "high single digit returns" over the next three to five years. The biggest risks are rising interest rates and to a lesser degree the fact that the US REIT market is fully priced.

He says trusts are currently trading at a premium to their asset backing of around 7%.

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