The corporate governance practices of the underlying companies in which a real estate investment trust (REIT) chooses to purchase shares is the most important factor to acknowledge when assessing the merits of these investment vehicles, according to a specialist fund manager.
“If you could only look at one thing, corporate governance would be the thing to look at particularly in REITs,” Phoenix Portfolios managing director Stuart Cartledge told the Australian Investors Association 2016 National Conference on the Gold Coast last month.
“If your investment process was simply to pick the stocks among the sector that have what I think is the best governance structure, you would have done very well over the last 15 years.”
Cartledge admitted making judgments about a certain organisation’s governance structures, such as assessing what makes a strong board of directors, could be a difficult process.
“This is a battle we have with corporates all the time, but all we can do, and this is the same with any of us with respect to judgments about directors on boards, is look at their track record,” he suggested.
“What else can you do?”
Good treatment of minority shareholders and an alignment of interest with investors were two other important characteristics companies should exhibit for a REIT to be comfortable with purchasing the organisation’s shares, he added.
In regard to the performance of the property market in the immediate future, Cartledge was optimistic.
“One key thing that is supporting [the current valuation] of property is that bond yields are so low,” he said.
“In a low bond yield environment, property yield is an attractive thing to invest in and that’s been a very supportive factor, and if bond yields continue to stay long for the next two, three, four or five years, then property will continue to be supported.”