How to spread the risk with global property funds

Real estate investors looking for diversification should investigate global property funds, which had one-year returns to the end of February as high as 65.7%. Indeed, nine of the 61 retail and wholesale global real estate funds on the Morningstar website (morningstar.com.au) have achieved one-year returns in excess of 30%, although many require minimum investments of $50,000.

Just as the experts are urging equity investors to put some of their funds into overseas shares to spread their risk, property investors could also benefit from diversifying overseas, especially since Australian real estate investors are so heavily exposed to local conditions. Any shock to these markets, such as a change to the negative gearing rules or including the family home in the assets test for the age pension, could cause a lot of grief.

The easiest way for most investors to include global property in their portfolios is through managed funds or exchange traded funds (ETFs). Basically, global property funds invest in baskets of overseas real estate investment trusts (REITs) and listed property companies that mainly hold commercial property, such as office towers, shopping centres, industrial complexes and leisure property. They earn income from rentals, much of which they distribute as income. Growth comes from increases in value of the properties. REITs generally perform best when interest rates are low.

Colonial First State Geared Global Property funds produced the top one-year returns - 65.7% for the wholesale fund and 62.95% for the retail fund - to February 28, reports Morningstar. Investors can access the retail fund, which returned 31.24%pa over three years and 27.87%pa over five years, with a minimum investment of $5000. The funds, which have 60% of their real estate holdings in North America, have a "neutral" analyst rating from Morningstar, partly because of personnel changes and higher than average region-specific risk.

Resolution Capital Global Real Estate Securities funds get a better wrap from Morningstar - a silver rating - meaning it believes the fund's advantages will outweigh the disadvantages.

One of Resolution's unhedged funds (APIR code IOF0184AU) returned 30.45% for the year to February 28 and 23.92%pa over three years. Its portfolio has 55% in North America, 14% in the UK and 11.5% in Australasia. The minimum investment is $25,000.

Investors who prefer ETFs have only one global real estate offering, the SPDR Dow Jones Global Real Estate Fund, which returned 33.63% in the year to February. It has 24% of its holdings in retail property and 19% in industrial and office real estate. It is invested 57% in the US, 9% in Japan and 6% in the UK.

But past performance is no guarantee of future returns, so investors should be cautious. A potential headwind for the sector is how REITS will fare in a rising rate environment, according to a midyear Morningstar report on the sector in 2014. This is exacerbated because REIT share prices are high, leaving them vulnerable.

When the US Federal Reserve surprised markets in May 2013 by flagging a tapering in its quantitative easing (QE) program, REITs suffered and the S&P/ASX 200 A-REIT Index fell more than 10% in a month, while the UBS Global Investors ex-Australia ($A hedged) Index fell almost 15%, the Morningstar report says.

But this is balanced by the long-term strategic role property plays in a portfolio.

"Listed property can be volatile, but it's a different asset class with different performance drivers from bonds and equities. Including listed property in a portfolio can add diversification, thereby reducing overall portfolio volatility. And it also acts as a source of income given the high dividend yield on offer from REITs," the report says.

Playing the rate game: to fix or not to fix

The fixed-rate debate has heated up again in recent weeks with the official cash rate (OCR) cut to another record low - one that most Australians would never have experienced before, and may never again. Many borrowers are asking, "Is this the lowest it will go?" It's a good question given the tendency for fixed rates to climb steeply before the OCR starts increasing again.

Even if it's not the lowest it will go, fixing does not have to feel like a gamble. Standard variable rates have moved down with the OCR and it would take a substantial number of rate increases for them to become an unattractive prospect for a fixed-rate loan to revert to. Make sure you check the features and rates that apply on any loan and open your horizon beyond the big four, because the competition is heating up. It's definitely a smart time to check comparison sites and ratings agencies like Canstar to see if there's a better fixed-rate offer that would suit you.

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