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PGIM Global Select Real Estate Securities – added to the Charles Stanley Direct Preferred List

This open-ended fund invests in a portfolio of REITs on a global basis. It harnesses a well-resourced team with excellent coverage across various markets.

| 7 min read

Confidence appears to be slowly returning to the commercial property market. With companies mandating staff spend more time in offices, attractive income in relation to now-falling interest rates, and economic growth holding up could it be time to take a fresh look at the sector?

Commercial property is divided into three main areas: retail, industrial and offices. In addition, there are specialist areas such as healthcare and subcategories such as logistics. Property offers the prospect of attractive income from rents and, over the longer term, some capital appreciation if the assets are well chosen. However, returns have been under pressure in recent years from rising interest rates, which make the income on offer appear less attractive versus lower risk alternatives such as bonds.

There have also been adverse trends affecting various parts of the market. Many retail assets such as malls have faced the headwind of greater online shopping, while the Covid pandemic upended the office market in particular. There’s a constant need to remain relevant to societal trends and keep up with regulation. For instance, in the UK from 2030 commercial properties with an energy efficiency rating of less than B cannot be let, meaning owners will have to spend considerable sums improving buildings.

Investing in commercial property using REITs or funds

Investors tend to access commercial property through Real Estate Investment Trusts or REITs, often those listed here in the UK. However, owning one or just a few REITs can be risky. As traded shares they can experience considerable fluctuations in price as investor sentiment ebbs and flows, which can be exacerbated by the cost of debt and any trends affecting their areas of specialism.

A potential solution is to take a wider approach by investing in a fund investing in a variety of REITs and property company shares. The price of the fund is directly linked to the value of the shares the manager invests in, and although each of these will rise and fall in value it’s typically a smoother ride as the portfolio is diversified across lots of different stocks. In addition, an active approach could help maximise returns over time if the manager is able to use their knowledge of the sector to focus on the better-performing areas and individual stocks.

An option identified by our research team is PGIM Global Select Real Estate Securities, an open-ended fund investing in a portfolio of REITs on a global basis. The fund harnesses a large and well-resourced team with excellent coverage across various markets.

Not all risks can be diversified away by taking a wide approach approach. For instance, a prolonged high-interest rate environment can be expected to dampen the real estate sector as a whole, even though over the long-term property as an asset class tends to hold its value well against inflation. That said, the evolution of the REIT market has led to a lot of diversity.

There is variation both in terms of capital structure such as the use of debt, which does increase interest rate sensitivity, and the emergence of new sub sectors such as data centres and self-storage where there are different structural drivers. This increase in choice widens the opportunity set, allowing good active managers greater scope to identify winners and avoid losers.

Find out more: Buy to let: what are the alternatives?

More about the fund

PGIM is the third largest real estate manager in the world. Most commercial real estate is privately owned and its experience as an owner and manager of private real estate assets offers its fund managers first-hand proprietary insights into trends that could enhance stock selection.

With competitive charges and a broad, global portfolio this fund could be a particular option for those concerned about their property exposure being too weighted to the UK. The portfolio is overwhelmingly invested in the US and Asia and presently has only 4% allocated to the UK. The fund doesn’t make big asset allocation calls in terms of country or sector, so there is always a natural skew to the US which is around two thirds of the global benchmark it uses.

While the portfolio is diversified by country and sector, the managers are willing to express their convictions at a stock level, typically holding just 30 to 45 names. This makes it quite distinctive in the sector, where there is a tendency for managers to be more ‘benchmark aware’, in other words not straying too much from the make-up of the index.

Part of the skill of the active manager is determining which REITs are best placed to navigate difficult periods through higher rents and good quality tenants. Through detailed company research that includes regular management visits, property tours and financial analysis, the managers analyse the quality and sustainability of real estate asset cash flows and growth of dividends. The team also evaluate the company’s strategy, management track record, management incentives, and its debt and cash position.

This fund is not run to generate income, though dividends form a significant part of total return in the sector. The yield could therefore contribute to an income portfolio and is currently 2.1%. All yields are variable and not guaranteed, and given the fund is predominantly invested overseas currency movements can have an impact.

Recent performance has been strong, although past performance is not a reliable guide to the future, and has been driven mostly by stock selection rather than asset allocation as we would expect. Manager, Rick Romano, notes they have benefited from rotating out of larger REITs at appropriate times based on their focus on valuations. There were also particular contributions from Welltower (healthcare property) and Digital Realty (data centre). A focused approach in mall operators also resulted in some strong returns.

PGIM Global Select Real Estate Securities Fund performance versus sector

Past performance is not a reliable indicator of future returns. Figures are calculated in £ on a % total return, bid to bid price basis with net income reinvested; Source: FE Analytics, data to 30/09/2024

In recognition of our growing conviction in the fund within in the context of its sector it has been added to the Charles Stanley Direct Preferred List. This is designed to provide a helpful shortlist of investment options for the consideration of investors who wish to make new investments. Please note investors who want to invest in a specialist area such as commercial property should ensure it forms only a small portion of a diversified portfolio.

Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

PGIM Global Select Real Estate Securities – added to the Charles Stanley Direct Preferred List

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