Andrew Parsons
Despite several real estate investment trusts (REITs) extolling the virtues of portfolio diversification, Resolution Capital Australia MD Andrew Parsons has cautioned against this strategy, advising trusts to rather simplify and specialise their asset portfolio.
“While it’s a popular strategy at the moment, diversification is one of the worst terms in the industry. The problem with this approach is that the company [often] can’t set a reasonable benchmark for returns and is tempted to raise its debt levels.
“There’s a good chance [of this approach] ending badly,” he told the first Nedbank South African REIT Association conference, in Johannesburg, on Wednesday.
REITs in Australia, North America and Europe were largely narrowing their property focus, he observed, moving more towards specialisation and simplification into one or two property asset classes, rather than expanding their portfolio in a bid to spread risk.
Retaining focus on key growth area nodes and urban nodes remained central to this strategy.
“My advice to REITs is to minimise costs and get more out of what you already have. It’s not about buying more, or ‘pie-eating’, as the Americans say,” he commented.
Parsons added that investment in mixed-use developments should not be confused with diversification, as accelerating urbanisation and modernisation continued to increase demand for multi-use developments, which could yield stable longer-term gains.
Cross-border investment should also not be discouraged, as international property markets became increasingly connected.
Making predictions on the South African REIT industry, and reiterating Parsons’ assertions, Nedbank Corporate Finance Gauteng regional executive Ken Reynolds expected local funds to become increasingly more specialised over the next 12 months, likely creating some volatility in the market.
“[However], I do see some diversification into African and global markets,” he noted during a sponsor address.
He also anticipated the listing of a residential REIT on the main board of the JSE, believing this to be “a long time coming”, while the pace of conventional new listings would probably slow.
Institutional investors would likely “unitise” their investments more in the coming year, moving away from direct property investments and towards investment in REITs.
“I’m also expecting more consolidation in the industry, where the bigger players will look to absorb the smaller funds. There may even be a merger between bigger REITs, which will be interesting to watch,” he noted.
Meanwhile, Reynolds outlined that Nedbank would look to allocate at least 1% of its lending spend to the REIT market in 2015.
“While this may not sound like a lot, it equates to around R6-billion,” he pointed out.