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Property stocks lure value investors

(Bloomberg)
Updated: 2007-05-21 10:03

Investors seeking the cheapest property stocks are buying in Japan, Germany and China after a two-year tumble in shares of US homebuilders.

Japanese land prices are rising for the first time in 16 years, yet shares of developers trade at less than a third the global average, according to UBS AG. The start of real-estate investment trusts in Germany is spurring demand for housing stocks valued at about half the worldwide mean. China's new laws protecting homeowners and Brazil's record-low mortgage rates are attracting money managers looking for the fastest growth.

Third Avenue Management LLC, ABN Amro Holding NV and Alpine Mutual Funds, which together oversee $20 billion in real-estate stocks, bought shares of Mitsubishi Estate Co. in Japan, Germany's IVG Immobilien AG and Cyrela Brazil Realty SA Empreendimentos e Participacoes for returns of as much as 22 percent this year. In the US, real estate and homebuilder indexes dropped at least 4.7 percent on forecasts housing prices will fall for the first time in 16 years.

"We're past the period of time where the rising tide has lifted all boats," said Sam Lieber, who oversees the $1.75 billion Alpine International Real Estate Equity Fund from Purchase, New York, which has beaten 98 percent of similar funds in the past three years. "Clearly we see better opportunities abroad."

Almost 90 percent of the fund's investments are outside the US, with the largest single country allocation in Japan. Lieber also has been adding to holdings in Brazil.

International Holdings

Investors seeking returns with a moderate amount of risk should put 33.5 percent of their real-estate stock holdings in Europe and 14.6 percent in Asia, a study released today by the National Association of Real Estate Investment Trusts in Washington and Chicago-based Ibbotson Associates Inc. showed.

A model portfolio from 1990 to 2005 would have recommended 8.1 percent in Europe and 4.1 percent in Asia, the study said.

The Standard & Poor's 500 Real Estate Index in the US has slid 16 percent from a record on Feb. 7, while a gauge of 16 homebuilders in S&P indexes lost 44 percent since July 20, 2005. The National Association of Realtors said this month that the median prices of new US homes will drop this year for the first time since 1991.

Japanese and Hong Kong property developers will offer the highest returns over the next 12 months, at an estimated 19 percent and 16.6 percent, respectively, according to Zurich- based UBS, the biggest money manager for wealthy investors.

Asset Bubble

Japan's property values are recovering from the collapse at the start of the 1990s. Nationwide land prices rose an average 0.4 percent last year, a government report on March 22 showed. Prices for commercial real estate in Tokyo, Osaka and Nagoya climbed 8.9 percent, the biggest jump since 1989, while residential prices in the cities ended a 16-year slide.

The longest economic expansion since the end of World War II drove Tokyo office vacancies down to 2.72 percent last month, the lowest in at least six years, according to Tokyo-based office broker Miki Shoji Co. Average monthly rent for prime office space in Tokyo jumped 25 percent to 56,750 yen per tsubo, equal to $13.51 per square foot, in the first quarter, according to Los Angeles-based CB Richard Ellis Group Inc., the world's largest commercial real-estate brokerage.

A measure of real-estate stocks in Japan's Topix index jumped 18 percent this year, exceeding a gain of 0.9 percent for the broader market. Tokyo-based Mitsubishi Estate, the world's largest publicly traded property company, jumped 22 percent this year, while Daibiru Corp., in Osaka, rose 36 percent.

Tokyo Builders

New Star Asset Management plans to buy shares of Mitsui Fudosan Co. and Sumitomo Realty & Development Co., Japan's second- and third-largest developers by value, for a property fund starting in June, said Gregor Logan, who oversees $41 billion as joint chief investment officer at the London-based firm. Both developers are based in Tokyo, home to one in 10 Japanese.

"The story in Japan is the property there has been very weak for many years and in the last 18 months, it appears to have clearly turned the corner," Logan said.

Shares of Japanese developers are undervalued because office leases are below market rates and asset prices haven't come close to their peak, according to Michael Winer, New York- based head of Third Avenue's real-estate team, which oversees $7.5 billion.

Mitsubishi trades at a premium of 5.6 percent to the net value of its property assets, known as net asset value, according to UBS, or about a quarter of the global average. For all Japanese property companies, the average premium is 6.6 percent. Commercial land prices nationwide are still less than a third of what they were at the height of Japan's bubble economy in 1991.

German REITs

"Until recently, I wasn't overly impressed with the fundamentals of the Japanese property markets," said Winer, whose $3.53 billion Third Avenue Real Estate Fund bought 379,000 Mitsubishi Estate shares in the three months ended Jan. 31, the firm's first property investment in Japan.

Third Avenue's holdings in Japan have increased to include a 5.15 percent stake in Daibiru, which owns 21 commercial properties in central Tokyo and Osaka, according to the fund's April 30 disclosure to Japan's Ministry of Finance.

ABN Amro's Nancy Holland says the biggest bargains are in Europe. She added to holdings of Bonn-based IVG in the first quarter as demand in the world's third-largest economy picks up.

REITs, property companies that can avoid paying taxes by distributing almost all of their net income as dividends, may help boost the German property market after prices stagnated following reunification in 1990. Commercial real-estate returns rose in 2006 for the first time in five years as prices fell at a slower pace, London-based researcher Investment Property Databank Ltd. said last month.

Global Premium

"We're finally starting to see positive rental movement," said Holland, who helps oversee $7.3 billion of property stocks at ABN Amro Asset Management in Chicago. "Occupancies are also starting to tighten up, so this tells us that this is a market that is poised for growth."

German property companies trade at an 11.7 percent premium to net asset value, according to UBS. That compares with the global average of 20.1 percent.

IVG, Germany's biggest publicly traded owner of offices, trades at a discount of 9.3 percent, data compiled by UBS show. The company's shares, up 38 percent in the past year, are down 3.6 percent in 2007.

Deutsche Asset Management fund manager Daniel Ekins is entering China's real-estate market by buying developers traded in Hong Kong, such as Kerry Properties Ltd. and Guangzhou R&F Properties Co. Hong Kong property companies are valued at a 2.7 percent premium to net asset value on average, the smallest in Asia, UBS data shows.

China Homeowners

A private-property law enacted by China in March allows people to own and sell assets for up to 70 years in cities. The law also requires buyers pay market prices for land.

Average disposable incomes in towns and cities, where 44 percent of the nation's 1.3 billion people live, rose 12 percent to $1,532 in 2006 as economic growth exceeded 10 percent for a fourth straight year, government figures show. The number of people living in urban areas has risen by 140 million since the start of the decade, more than the population of Japan.

That's helping boost real-estate values. The average price of new homes in the nation's 70 largest cities climbed 6 percent from a year earlier in March, according to a survey by the National Development and Reform Commission.

Hong Kong Developers

"The China growth story is one of the reasons we like Asian property," said Ekins, who helps oversee $3 billion in property stocks at Deutsche Asset in Singapore. Urbanization will create "strong demand for office, retail and industrial space."

His Deutsche-RREEF Global Property Securities Fund has climbed 52 percent in the last 12 months, exceeding all but one of the 374 Asia-based property funds tracked by Bloomberg.

Hong Kong-based Kerry Properties, which owns office and residential buildings in Beijing, Shanghai and four other cities on the mainland, had 40 percent of its sales in China last year.

Guangzhou R&F, the largest developer based in Guangzhou, the capital of China's richest province, said this month that first-half sales will probably climb 36 percent.

Hong Kong residential prices will increase as much as 10 percent this year after climbing about 70 percent since 2003, when the city was struck by severe acute respiratory syndrome, according to CB Richard Ellis.

Alpine's Lieber, who started the first US international real-estate mutual fund in February 1989, favors emerging-market property stocks, especially in Brazil, where mortgage lending is climbing more than 20 percent a year.

Property Search

"We have to focus on markets where there's superior growth prospects and greater demand," he said. "And there is just a dearth of high quality, modern property" in emerging markets.

Sao Paulo-based Cyrela Brazil Realty, the nation's largest real-estate company, was the Alpine International fund's seventh-largest holding at the end of the first quarter. Cyrela's shares rose 20 percent this year as interest rates fell to record lows, spurring demand for homes and offices.

Brazil's central bank cut its lending rate to 12.5 percent in April, from as high as 19.75 percent in September 2005, when policy makers began a series of 15 reductions. Mortgage loans jumped 23.9 percent in the 12 months ended in March, according to the central bank.

Brazilian IPOs

The real-estate demand has sparked initial public offerings, with a total of 19 developers including Cyrela listing their shares since September 2005. Some investors are concerned about a glut of stocks and inflated prices. Shares of Cyrela and Sao Paulo-based Gafisa SA, Brazil's second-largest real-estate company, trade at 25.6 times and 27.2 times estimated profit, more than double the average 10.2 times for stocks on Brazil's benchmark Bovespa index.

"A lot of those guys went public and didn't even know how to use the money," said Milton Milioni, who manages $2 billion at Geracao Corretora de Valores in Sao Paulo. "There were good companies and bad ones, but the good ones were overpriced."

Alpine's Lieber said he's not concerned that stocks appear expensive because of the potential for growth.

"There has been a dramatic repricing of real estate around the world, and I think that's the issue that people have to either accept or reject," Lieber said. "I want to see value creation. The potential is greatest, and it's not fully priced in" in emerging markets such as Brazil, he said.