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AMP encourages Kiwis' appetite for property

By Rob Hosking

Friday 16th May 2003

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New Zealanders' infamous appetite for property investment looks set to find a new outlet.

Internationally, property has become attractive again. Six months ago, AMP Henderson launched its Global Property Securities Fund in Australia.

Internationally, the fund made a pre-tax and fee return of 7.6% for the half year to March 31 while the benchmark index rose 4%.

The Australian component of that posted a return of 9.3% (before fees and taxes), while the benchmark rose 2.4%.

A New Zealand version will be launched within the next two months, London-based portfolio manager Patrick Sumner said.

Mr Sumner, in New Zealand to talk with the local operation and also potential investors, said that with world equity markets still in the doldrums, investors were flocking to property.

He said there had been strong interest here, particularly from company-based superannuation schemes which were keen to diversify.

"The global property securities market is returning around 8-9% before tax at the moment.

That's a pretty good return in the current environment.

Most of the AMP Henderson fund is in the US property market, he said.

"We've got about 65% in the US, 12% in Australia, 2% in Asia and rest in Europe."

He said that made the fund overweight in the US market but a number of unique factors were driving it including historically low interest rates.

"In Europe, the residential market isn't all that interesting for our sort of fund ­ the property companies that are available for us to invest in don't invest in that market. That's similar in Australia.

"In the US though it's been a little different.

"You have what's called the 'multi-family sector' ­ two- to three-story apartment blocks."

Another sector that had turned around quite quickly was US hotels.

"That's been a sector to avoid in the recent past. They sank 25% in value in the last quarter of last year and another 17% in the first three months of this year.

"But since the end of the Iraq conflict, they have bounced back 15% in that short time."

The popularity of the sector had sunk so low that hotel properties were being priced at about 65% of the cost of replacement of the buildings.

"They'd already slashed dividends to the bone. Then the market suddenly felt they'd fallen far enough."

He said the real catalyst appeared to be that people were travelling again within the US, after a long, post-September 11 period of staying home where possible.

The funds moving into property were driven by other factors, many of them demographic.

The aging baby-boomers were now hitting their mid-50s and looking for more conservative investments than equities.

That trend would have occurred anyway but has been exacerbated by the poor performance of sharemarkets since April 2000.

Mr Sumner said that like New Zealand investors since the 1987 crash, American investors have been burned and were looking for less volatile places to put their money than equities.

"What we have changed our mind about recently is how the average institutions and retail investor would feel about real estate investment trusts (REITs).

"Six months ago we took the view that if the S&P 500 started climbing, people would rotate out of REITs to get into the growth sectors. That hasn't happened to any extent, and in fact there is money waiting to get into the REIT sector."

As well as less volatility, the other attraction in the property market was a steadier stream of income.

Investors that had stayed in equities had, since the "tech-wreck" of 2000, tended to demand more in the way of dividends.

A clear corollary of that was that if they could not get that sort of income from equities, they would move to a sector which would provide income.

"Apart from property, the only other sectors that give you any sort of a yield are utilities and tobacco and they have other risks attached, as Enron has shown."

Mr Sumner said although property had become more popular of late, it did not mean investors coming to market now are getting in at the top.

The US property market hit a peak in 1997 but then took a rapid slide. It had been flat ever since.

"The other thing investors are nervous about is office space.

"It's true the net demand for office space has evaporated but in some areas of the US there is high demand for that sort of property."

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