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Earlier this week, Marty Cohen visited Hong Kong. He and some of his colleagues from that office (including Derek Cheung, the portfolio manager in charge of the firm's Asia Pacific research; Stephen Kenneally, who handles business development; and Sayuri Ohyagi, investment analyst) sat down to lunch with AsianInvestor.
So: why Reits?
Martin Cohen: Robert Steers and I founded this company just as the US Reit market was taking off. It seemed like an efficient way to capture a steady yield that would consistently beat fixed income. Another thing I like about Reits, particularly as the asset class has expanded globally, is the way it captures a local economy. ItÆs a great, liquid way to diversify. If you buy Sony, are you buying Japan? No, itÆs a global company. But if you buy a Japanese Reit or property developer, you get a pure play on that market.
How much of your firmÆs portfolio is now invested in Reits or property-related stocks outside the US?
Our total US real estate portfolio, as of the end of June, was $13.8 billion. Our global and our non-US portfolios total $12.6 billion, which includes $330 million dedicated to Asia Pacific real-estate securities. So to answer your question, itÆs about half.
Your business has expanded internationally: why?
It started because 10 years ago Reits in the US began to invest overseas. I had to travel to understand if these managers were working with the right partners, with the right strategy, and to make sure they werenÆt putting their capital at risk. We had to do international research just to understand our largest holdings in the US.
WhatÆs your take on the subprime fallout?
A few things have happened in the US. There has been a re-pricing of risk, as anybody will tell you. In real estate, liquidity has been withdrawn from commercial mortgage-backed securities or loans to developers. Borrowing costs have risen and thereÆs been more demand for equity in new projects. All of this means prices in real estate are falling. The US Reit market is down 20% from its high in February.
Is the US market now attractive?
Yes. IÆd say itÆs trading now at a slight discount to asset value. But then you have to ask, where is the general economy headed? If it goes soft, everythingÆs finished: real estate, industrial stocks, theyÆll all have problems. I donÆt know which way the economy will go. My sense is weÆll have a slowdown but not a recession, but when I look at housing statistics, itÆs clear weÆre headed for uncharted territory. How will this impact consumers?
So are you moving into cash?
No, our mandate is to be fully invested. We donÆt time markets that way. We follow a disciplined valuation model and we allocate to where value is best within the universe. Our turnover is not high but we are actively managing the portfolio every day.
How will returns be affected?
Last year saw extraordinary returns. Our global portfolio returned 26.6% in 2006, with the US the strongest performer. So far this year, however, Asia has been the only positive market. Our global portfolio is down -1.4% year to date, and our US portfolio is down -6.6%, although it remains up 14.1% on an annualised basis since inception in 1985. But the Asia component is up 13.1%. That said, there is a good chance the US will outperform other markets in 2008.
Within Asia, what are the most attractive markets?
We donÆt have a formal country allocation. We rank all the names by their fundamentals on a global basis. But many of the companies we like are Reits in Hong Kong and developers in Japan. Some of these names are delivering dividends as high as 7%, and stock prices are offering discounts as deep as 20% where before they were often priced at a steep premium. We especially like some of the Japanese developers that are now trading at a 30% discount.
You donÆt like J-Reits?
No, and neither do the Japanese investors. I was at a dinner in Osaka recently with 10 high-net-worth clients. Someone asked me if I liked Japanese Reits. I didnÆt want to be too negative or impolite, so I said some are okay. The clients all said, ôNo, theyÆre horrible, theyÆre all trading at big premiums.ö These Reits are being bought because of their higher yields, not because of their fundamentals or the stories in their underlying properties. A lot of trading in Japan is done for reasons other than value û like for relationships, for example.
But foreign investment is also increasing in Japanese Reits.
Yes thatÆs true. And we do own those which our research has identified as having great value. WeÆre the single largest investor in the Kennedix Reit, and major investors in two others.
Why have J-Reit yields risen?
Because investors expect the Bank of Japan to raise interest rates. J-Reit prices are off 30-40% this year. ThereÆs been a lot of selling by hedge funds and the like, not because of fundamentals, but to respond to margin calls.
And why do you like JapanÆs developers?
TheyÆre more dynamic than Reits. J-Reits arenÆt like Reits in the US. Their structure isnÆt as flexible, they canÆt do new developments, their management is external to the Reit structure, and some regulations remain a grey area.
How long will it take for India and China to approve domestic Reits?
These countries struggle with available residential property. Their focus is on building local housing for sale, not for rent. The Reit concept may develop to look more like direct real-estate investment for locals. Of course Reits are a global concept and we know regulators in both countries are exploring the idea, but it will take time û the supply of suitable assets to put into Reits is just too low. TheyÆre also looking at this in the Philippines.
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