MARKET VIEWS

I attach a chart of the Australian listed property trust sector (AREITs) over the last 5 years.

After enjoying what seemed to be a fantastic bull market, we have seen a precipitous fall that has no doubt caught most investors on the wrong foot.

One can certainly make the argument that this is no different to the performance of REITs across the globe, but the fact is this is only partly true, as yes global markets have suffered a similar fate yet Australia on a relative basis has fared worse. In the chart that follows you will see that over the last 5 years the relative performance has been steadily dropping and is close to 2 std-deviations from its mean; despite the attempt in the 4^th quarter of 08 to march ahead.

My simple explanation for this relative underperformance is due to the fact that Australia through its forced savings legislation (Super) amassed a pool of capital for investment that was far greater than the investment opportunities in Australia itself. As we know that money burns a hole in our pockets, the investment managers we placed our faith in clearly failed to heed this age old lesson and plunged head first into every conceivable investment venture around the globe. I am focusing on real estate but the same can be said for other asset classes. I recall being amazed at the statistics a few years ago when reading research reports that Australia was the 2^nd largest and in some countries the largest foreign investors in real estate.

I recall the main theme of NAREIT end of 2004 (I haven't checked the date) was the subject of the JV model, whereby US REITs would sell a few assets into an SPV which would be capitalised by typically an Australian fund whereby the newly capitalised SPV would then go on a spending spree. The beauty for the US REIT was they got to earn management fees on the properties they sold to the SPV plus all the new ones bought. This JV model I believe gave what used to be regarded as modest income growth stocks a fuel injection that led multiples to levels that were destined to fail.

The question we need to ask ourselves is for how much longer will Australia choke on its excessive offshore investments.