Our multi-manager funds cover a diverse range of asset classes, but I believe some of the most interesting opportunities just now can be found in commercial property in Asia and eastern Europe. Global property markets are not as correlated as other asset classes, such as equities. After the Asian currency crisis in 1997, Asian property went into a protracted bear market as foreign investment money was withdrawn. At the same time, Western property markets continued to deliver strong returns based on solid fundamentals of rental growth and investor demand. But valuations between the two markets have now become distorted as the bull and bear markets in the UK and Asia have run their respective courses.
Property yields are now below those provided by government bonds in the US and western Europe, while healthy property yields are abundant across Asia, particularly in Japan. In the UK, property is far more reliant on continued rental growth at a time when the economy is entering the latter stages of the cycle. But in Asian markets, the yield already offers significant upside and, with rental growth now appearing across all major markets, there is far more potential for strong yield compression and capital appreciation.
Asian property - best investments
Within the region, I like the Celsius Asian Property Income Fund. This fund invests in a broad range of pan-Asian property firms and Real Estate Investment Trusts (Reits), and the fund manager uses derivatives for efficient portfolio management. This delivers a yield of almost 10% in sterling terms, with lower volatility than the property indices, but means foregoing some of the potential for capital growth.
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Speymill Capital Macau Property (MCAU) and Sniper Capital Macau Property (MPO), two real-estate development companies, are also interesting. The liberalisation of gaming in Macau has seen a huge flow of overseas capital into tourism and gaming industries, providing huge upside potential for its residential, retail and commercial property markets. As the only legalised gaming city in China, it is becoming the number-one destination of its kind in the world. A massive influx of Western casino developments has begun and gaming revenues are expected to outstrip Las Vegas in 2007. These two stocks not only give exposure to emerging property, but also to the underlying currency because deals are priced locally.
Eastern European property - a top stock
Finally, we come to eastern Europe. High-growth in economies such as Estonia and Latvia has translated into rapid house-price appreciation. Why? Because land is a limited resource and labour costs (including housing construction) increase with economic growth. While most developed European countries have rental yields of around 5%, Poland, Romania, Slovakia, Moldova, Bulgaria and Croatia have yields between 9.3% and 13.3%. Some western European countries are relatively high yielding, but also have quite substantial disadvantages as investment destinations; there is less potential for capital gains, higher transaction costs, pro-tenant' laws and dramatically lower GDP growth. My favoured investment here is Atlas Estates (ATLS), which floated with an initial portfolio of real-estate interests in eight income-generating properties and development projects in Poland, Hungary and Slovakia. The management has a good record of identifying, developing and managing properties in the area.
The stocks Cukic-Munro likes
12mth high 12mth low Now
Speymill Capital Macau US$1.30 US$1.10 US$127
Sniper Capital Macau 113.5p 95p 113.5p
Atlas Estates 359p 238p 330p
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