A slew of property funds have been launched in recent weeks, causing a bit of a stir in the market. Most of these products are global property funds, a relatively new asset class for local investors. Global property funds mainly invest in REITS (Real Estate Investment Trusts). These are securities that sell like a stock on the major exchanges and invest in real estate directly, either through properties or mortgages. REITS receive special tax considerations, and typically offer investors high yields as well as a highly liquid method of investing in real estate. Equity REITS invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Property funds can also invest in investment companies (holding companies that only buy properties and receive rental income), or property developers (companies engaged in building and land development activity). With so many funds available, investors may be a little confused as to the how the individual funds differ. So we've come up with a comprehensive snapshot of the various global and Asian property funds available to retail investors. For the purpose of this article, we will focus only on those funds sold through Fundsupermart.

Henderson Global Property Equities Fund

Investment objective: This fund seeks to provide investors through investment as a feeder fund in the Luxembourg-based Henderson Horizon Global Property Equities Fund with long term capital appreciation by investing in the quoted equity securities of companies listed or traded on a regulated market which derive the main part of their revenue from the ownership, management and/or development of real estate, throughout the world.

Benchmark: EPRA/NAREIT Global Total Return Index in USD

Key features of the fund: This fund places a higher emphasis on capital appreciation as opposed to dividend yield. As such, it takes on more risk than yield focused property funds, for a potentially higher return. The portfolio's regional allocation will follow the benchmark quite closely. According to lead manager for the fund Patrick Sumner, the benchmark index is much broader than indices that focus on REITS. He says that this index also incorporates global property developers. Asia is also a larger part of this index. As at the end of February, the fund was overweight Europe and Asia vis-a-vis the benchmark.

The fund has a tracking error target of 4-6%, and a portfolio of 50-60 stocks. There will be no currency hedging for this fund, but currency views will be expressed through the investment process. Sumner is the Head of Asset Allocation for the fund, and the manager of the European portfolio. He's also the fund manager for the Henderson European Property Securities Fund. The US portfolio will be managed by Kim Redding & Associates, while the Australasian portfolio will be managed by Brett Ward, from AMP Capital Investors. The Asia Pacific Portfolio will be managed by Chris Reilly from Henderson Global Investors.

DBS Global Property Securities Fund

Investment Objective: To invest in listed REITS and other listed property stocks/securities globally with the primary objective to deliver stable yield above the UBS Warburg Global Property Investors Index and provide stable capital growth over the long term.

Benchmark: UBS Warburg Global Property Investors Index, a sub-index of the EPRA/NAREIT

Key features of the fund: The sub-manager for the fund is AMP Capital Investors, Australia. The investment team will be led by Brett Ward, who's responsible for the Australian portfolio, and the overall performance of the fund. The European portion will be managed by Henderson Global Investors UK under Patrick Sumner. The US portfolio will be managed by Kim Redding & Associates based in Chicago, under Kim Redding. There fund will have a currency overlay, done by DBS Asset Management. The fund intends to payout 4-5% per annum at the discretion of the fund manager.

Up to 70% of this fund will invest in REITS. As such the fund's benchmark, the UBS Global Property Index, is REIT focused. Companies listed in the fund's benchmark, derive around 70% of their revenue from rent. Because of the fund's emphasis on REITS, the fund is overweight Australia and the US market says lead manager Brett Ward. Australia and the US are considered more liquid market for REITS. According to AMP Capital Investors, the focus on yield means that the fund will have some cushioning in a market downturn.

United Global Real Estate Securities Fund

Investment Objective: The fund will invest in the global real estate securities primarily through investments in listed Real Estate Investment Trusts (REITS), dividend paying equity securities and debt securities of companies which are engaged in the real estate industry.

Benchmark: S&P/Citigroup World Property Index

Key features of the fund: The sub-manager for this fund is ING Clarion, and they will manage the non-Asian portion of the fund. The Asian portion of the fund (minus Australia and New Zealand) will be managed by UOB Asset Management. This fund intends to payout 4% per annum (based on NAV) over 4 quarters. The fund will only invest in companies with a minimum market capitalization of US$ 100 million, and up to 70% of the fund will be invested in REITS. It will not invest in pure property developers. The fund will not be hedged, but currency views will be incorporated into the investment process. The country allocation for the portfolio can deviate significantly from the benchmark, resulting in an above average tracking error for the fund. According to UOBAM, this fund will take a total return approach focusing on both yield and capital appreciation from property securities.

SGAM Asian Real Estate Dividend Fund

Investment Objective: To achieve long term capital growth and provide a target dividend payout of 5% per annum by investing into a portfolio of equity securities such as REITS involved in the ownership, management and development of real estate in the Asia Pacific excluding Japan region.

Benchmark: MSCI AC Pacific ex-Japan Real Estate Price Index

Key features of the fund: Unlike other property funds which are global, this fund is focused on the Asian real estate market. Up to 50% of the fund will be invested into REITS at the fund manager's discretion. The fund can also choose to invest up to 30% in bonds to cushion the portfolio against economic downturns. As the Australian market forms a large part of the benchmark index, it will account for a significant portion of the fund. According to SG Asset Management, the fund can overweight or underweight existing benchmark positions by about 10%. The fund is currently underweight Australia and Hong Kong and overweight Singapore and Thailand.

REASONS TO CONSIDER PROPERTY FUNDS

The following are some of the most frequently cited reasons for investing in property funds:

• Diversification in an investment portfolio; property funds have low correlation to bond and equity markets
• Rental revenues from property securities are passed on as dividend yield to investors
• Individual property markets are relatively uncorrelated with each other; they tend to be more dependent on local factors.
• Enables investors to gain exposure to global property markets without having to buy physical property
• An opportunity to participate in economic growth as real estate prices tend to be correlated with the economic cycle

The rental income for property funds is derived primarily from commercial properties (mainly from the office and retail sectors). These rental revenues are considered relatively stable as they are locked in through long term contracts. Global property fund managers also point out that this asset class fares well against other asset classes. When compared with the risk-adjusted returns from bonds and equities, the returns from global property markets are favourable.

NO BUBBLE IN PROPERTY MARKETS SAY FUND MANAGERS

Most global property funds invest substantially in US, Europe and Australia. These REIT markets experienced strong returns in 2004, and a substantial part of that performance was due to fund flows into that sector, as investors searched for asset classes that offered them better yields. This has raised concerns that global property markets have run up and may in the near future, be vulnerable to a correction (click here for our research article on property funds).

In response, global property fund managers that Fundsupermart spoke to have said that the asset class is not in a bubble. While investors should not expect the kind of returns that they got last year from global property markets, fund managers believe that property funds should be able to deliver steady returns. That's because the underlying assets are physical properties that are capable of generating yearly income. They add that the fund inflows into the asset class is long term money from pension funds, and that as the global population ages further, more investors will allocate a portion of their investments into global property funds. Also, the increasing availability of property funds could be evidence of the fact that smaller investors are warming to the idea of owning property through professionally managed funds.

According to Henderson Global Investors, the bubble scenario for example, may apply to residential property prices in the UK, but the UK residential sector accounts for less than 1% of the property exposure of the European quoted property companies. Across Europe the residential sector accounts for 7%. That's why the fund house is still bullish on the European commercial property sector despite the strong returns that their European property fund achieved last year (click here for an article on the fund).

Both Henderson Global Investors, and AMP Capital Investors (sub-managers for the DBS Global Property Securities Fund) say that volatility for the asset class should not increase next year, and expect positive returns for their global property funds.