Investors lose out to fund managers
The managers of listed property funds reaped rising profits for more than a decade while dividends to investors fell, analysis from Craigs Investment Partners has found.
In a research note , Craigs analyst Chris Byrne said over 13 years since 2001, dividends per share paid to investors by six listed property funds had fallen by an annual average of 1.7 per cent, while revenue to the external managers had risen by an average of 12 per cent a year.
"In our view this divergent performance highlights the conflict of interest within the sector which has been created by legacy governance structures."
Byrne said although property trust fees had been criticised before, the extent of the problem had been "a black box".
"The point [of the analysis] was to highlight the differences with numbers."
Before the financial crisis all of the funds were run by external managers whose boards were responsible to different shareholders. This meant the managers were incentivised to increase the size of the fund and boost their own fees, rather than increase dividends to investors, said Byrne.
"We believe this misalignment of interests created by the trust structure has played, at least in part, a role in a sub-optimal outcome for investors."
Since the crisis most of the funds had changed from a trust to a corporate structure and half had internal management, which would help improve the accountability of boards, said Byrne.
The analysis found the two worst funds for poor dividend performance and high management returns until 2012 were Goodman Property Trust and Argosy Property.
Goodman remains externally managed by Australian-listed Goodman Group, while Argosy's management was internalised in August 2011.
Along with DNZ Property Fund, Argosy now had the best corporate governance structures of the listed property sector, said Byrne.
Fund manager Matt Goodson of Salt Funds Management said Byrne's report was right in identifying the flawed incentives in several property funds.
The whole rationale of Goodman Group was to use the New Zealand entity as "the wood duck" to fund the growth in its fee streams, he said.
"So even though the quality of its properties is pretty good, it's really run for the parent, not the investors in GMT"
But while governance was important, an internally managed corporate structure was "no guard against idiocy", said Goodson.
Byrne's report was right to focus on management incentives, but "the other thing that really matters for long-term investors is the management expense ratio, MER".
"For example this gives a high mark to DNZ, but one of my concerns there is it has quite a high MER," Goodson said.
Byrne's research report noted with concern a correlation between the size of directors' fees and funds under management, FUM, at the property firms.
"It is difficult to see why increasing FUM should lead to higher director fees given directors are not responsible for day-to-day operations of the [listed property vehicle]," Goodson said.
Byrne said ending the old trust fee structures was no panacea.
"Vital [Healthcare Properties] has some of the worst corporate governance in the sector but it has done very well."
However, overall "returns have been sub-optimal. They can be better and changes to corporate governance will help."