Morningstar Wraps Up Research on Australian Listed Property

Morningstar Wraps Up Research on Australian Listed Property Strategies

Good morning

Morningstar today released its Sector Wrap-Up for Australian listed property funds, covering 21 individual strategies. Morningstar does not charge or accept payment from fund managers to participate in qualitative research reviews.

Key Findings

• We gave one strategy the highest-possible Morningstar Analyst RatingTM of Gold, Vanguard Property Securities Index. Four were designated Silver, and a further three Bronze.

• The case for a dedicated Australian listed property allocation has been questioned following the dramatic performance volatility and increasingly concentrated universe. However, the healthier balance sheets, reduced gearing, divestment of offshore assets, more sustainable payout ratios, return to traditional rent collection, and prospect of continuing high and comparatively stable income mean that Australian listed property can play a meaningful role in an investor's portfolio.

• Any allocation should be in a supporting capacity, and is most suitable for investors specifically targeting income or in drawdown phase. Before investing in a dedicated AREIT vehicle, investors and advisers should first assess the extent of any existing exposures. We suggest an allocation of no more than 10.0 percent to Australian and global REIT strategies combined, although this will depend on individual needs, objectives, and risk profiles. Investors with a more income-focused orientation may look to prefer AREITs, while those seeking a greater growth profile may lean towards global property. Any listed property allocation should be considered a relatively defensive component of a broader Australian equities allocation, or housed within a broader global listed property sleeve.

• Listed property funds' lack of returns differentiation from the index makes it difficult to outperform the index and competitors, especially net of fees. A smaller fee hurdle can be a substantial and sustainable competitive advantage over time for Australian listed property funds, and our Morningstar Analyst Ratings reflect this conviction.

• The principal structural limitation of a lack of diversification remains. The sector continues to be particularly concentrated relative to other asset classes at the individual stock and sub-sector levels and in the number of stocks. Although some fund managers have broadened their eligible universes to include infrastructure and property-related stocks, any further reduction in sector constituents could critically impair fund managers' ability to build portfolios of investable stocks.

ENDS

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