Global Real Estate FoF can augment MF investors’ risk-return profile: Srinivas Rao Ravuri

Real estate historically has been a hedge during periods of rising inflation. It has also relatively outperformed other asset classes like stocks and bonds during periods of sustained higher inflation.

A Global Real Estate Fund of Fund may be considered for diversification against a traditional stocks and bonds portfolio. It is a standalone asset class in itself, due to its unique characteristics. It has the potential to augment the risk-return profile, when combined with a traditional stock/bond portfolio, over the long term. In the current market scenario, inflationary expectation over the medium term is rising and real estate historically have been a beneficiary during such periods. A Global Real Estate FoF is a unique opportunity for investors to have exposure to an asset class which has the potential to be income generating and may act as an inflation hedge, says Srinivas Rao Ravuri, CIO – Equities, PGIM India Mutual Fund.

In an exclusive interview with Sanjeev Sinha, he shares his views on whether a Global Real Estate FoF is a good option for investment in the current scenario? Excerpts:

What is a REIT and how does Global Real Estate FoF, which invests predominantly into REITs, work?

REITs are Real Estate Investment Trust. REITs own, operate, lease or finance real estate properties. REITs pool money from various investors to invest in different properties. By leasing space and collecting rent on its real estate assets, REITs generate income which is then paid out to shareholders. Globally most REITs are listed and thus are publicly traded like stocks.

Global Real Estate Fund of Funds are mutual fund schemes, which invest in a portfolio of real estate assets, including listed REITs and other securities. A Global Real Estate FoF invests into an underlying fund, which typically invests in REITs and other instruments, which can provide the following characteristics:

⦁ Has potential to generate relatively higher income opportunities in the form of rentals and dividend yield
⦁ Scope of capital appreciation opportunities over a full cycle.
⦁ Traded like a stock. Provides instant liquidity but this also makes it volatile.

Is a Global Real Estate FoF investing into REITs fund a good investment?

Global Real Estate FoF invests into real estate opportunities all around the world. The portfolio is typically invested into income-producing real estate. The underlying portfolio may be invested across various REITs and real estate securities. Structurally, REITs are income-producing real estate or related assets, which may include office buildings, shopping malls, apartments, hotels, resorts, warehouses etc. Global Real Estate FoF provides exposure beyond traditional real estate sectors; for example, exposure to REITs focussed on investing in Data Centres, Warehousing and Cold Storage, etc.

Unlike other real estate companies, typically REITs do not develop real estate properties to resell them. Instead, a REIT own pre-developed and pre-leased properties primarily to operate them as part of its own investment portfolio and seeks rental income on the same.

A Global Real Estate Fund of Fund looks to invest across geographies such as the US, European, and Asia Pacific real estate markets, among other regions, to find potential opportunities around the world. There is further diversification in the way they may have exposure to sub-sectors within real estate to include options beyond the usual commercial or residential real estate formats like data centres. The objective though remains income generation and possible capital appreciation.

Is a Global Real Estate FoF a good investment taking into account the current market scenario?

A global real estate FoF may be considered for diversification purposes against a traditional stocks and bonds portfolio. A Globally Diversified Real Estate Fund like PGIM India Global Select Real Estate Securities Fund of Fund is a standalone asset class in itself, due to its unique characteristics. It has the potential to augment the risk-return profile, when combined with a traditional stock/bond portfolio, over the long term. In the current market scenario, inflationary expectation over the medium term is rising and real estate historically have been a beneficiary during such periods.

What is the benefit of a Global Real Estate FoF compared to other funds / investments?

Global Real Estate FoF offers investors an opportunity to earn possible returns through investments in the real estate sector. The benefits that global real estate FoF offers is affordability, accessibility, diversification and professional management. A global real estate FoF provides a simplified process by way of transactions and any disclosure requirement and taxation when it comes to handling real estate on their own, especially when investing outside India. At the same time, REITs offer investors with the opportunity to buy real estate as a financial security, and take exposure to this asset class to diversify portfolio risk in a convenient manner.

Structurally, REITs invest in real estate with income earning potential and, based on the fund’s objective, most of them distribute the income among investors of the REITs, making it a good choice for investors seeking income. Typically REITs have income generation potential by way of renting, leasing or selling real estate, depending on the portfolio it manages. For Indian investors, a global real estate FoF can offer easy liquidity along with simplified taxation process and disclosures requirements as opposed to investing in properties abroad on their own. A Global Real Estate FoF is a unique opportunity for investors to have exposure to an asset class which has the potential to be income generating and may act as an inflation hedge.

A Globally Diversified Real Estate Fund of Fund is a standalone asset class in itself, due to its unique characteristics. It has the potential to augment the risk-return profile, when combined with a traditional stock/bond portfolio, over the long term.

Global REITs have given strong historical performance over 20 years. Global REITs’ performance has been a combination of income and growth, with 40% coming from income and 60% coming from capital appreciation.

Traditionally, investors have relied on a mix of equity and debt investments. How has this changed today?

Real estate historically has been a hedge during periods of rising inflation. It has also relatively outperformed other asset classes like stocks and bonds during periods of sustained higher inflation. Real asset value tends to increase as replacement cost increases over the long term and also leases and rental agreement are generally tied to inflation rate and tend to increase as price rises in the economy . Historically, income generated for REITs has outpaced inflation in 39 out of the past 41 years. The benefits that global real estate FoF offers is affordability, accessibility, diversification and professional management. Investors face less hassles by way of transactions and taxes when it comes to handling real estate on their own, especially when investing outside India.

How will investors benefit by investing in the Global Real Estate FoF NFO through PGIM India MF?

Benefits of investing in the PGIM India Global Select Real Estate Securities Fund of Fund for Indian investors include:

⦁ Unique global opportunities, not available in India – Global Real Estate represents opportunities in various sub-sectors, which are either not available in India or it lacks the global scale and depth. The fund invests in sectors like Senior Living, Grade A Offices, Logistics, Cold Storage Facilities, Warehousing, Data Centres, Healthcare, Last Mile Retail, Urban Apartments, Self Storage etc.

⦁ Potential Inflation Hedge – Real Asset whose value tends to increase as replacement cost increases over the long term. Income generated for REITs has outpaced inflation in 39 out of the past 41 years.

⦁ Access to small ticket size – Apart from physical real estate (primarily residential), most retail investors in India do not have too many options to participate in the upside that real estate as a sector has to offer. A ticket size as small as Rs 5,000 in PGIM India Global Select Real Estate Securities Fund of Fund makes participation in real estate more affordable as well.

⦁ Dual source of Alpha – Participation through a REIT structure can offer potentially higher income opportunities. In addition, listed REITs can provide capital appreciation opportunities also, over the long term. In the last 20 years, 40% of the performance has been through Income for listed REITs.

⦁ Diversification – Provides diversification beyond the traditional stock/bond combine. The underlying fund, PGIM Global Select Real Estate Securities Fund’s portfolio can provide additional geographical diversification benefit as well. Real estate forms the third largest component of portfolios in developed markets at 14% whereas it is negligible in the Indian context.

⦁ PGIM Real Estate, which manages PGIM Global Select Real Estate Securities Fund, is amongst the Top 2 Global Real Estate Investment Managers.