Why Goodman's rise has changed the game for listed property investors
Listed property has several perks but investors seeking diversification and better value might want to look beyond the index.
Mentioned: Cromwell Phoenix Property Securities (16260), Goodman Group (GMG), VanEck Australian Property ETF (MVA)
Investing in property is something of a national pastime, with ATO data regularly showing that over 20% of Aussie taxpayers own a property other than their usual place of residence.
Buying another apartment or house in the hope of capital gains or income isn’t the only way to benefit from property ownership, though.
Several prominent Australian property owners are public companies or real-estate investment trusts that anybody can invest in and become a part owner of. And while you can’t take advantage of negative gearing like you can with an investment property, investing in publicly traded real estate has several advantages.
For one, there is a far smaller financial barrier to getting started. Instead of needing to have home equity up your sleeve or having to save a 20% deposit, you can start investing in publicly listed property with as little as $200 if you buy an exchange traded fund (ETF) or shares in a real estate investment trust (REIT).
On top of this, public markets give you the chance to become a part-owner in real estate of a quality that most people would never have access to otherwise. After all, many of the best located and most iconic buildings from your nearest city will be owned by public companies, from Westfield shopping centres to many skyscrapers in Melbourne or Sydney’s CBD.
Investing in publicly listed real estate can offer you more diversification than buying a single property. You also won’t have to manage and maintain the property, so any income earned from the investment might be considered far more ‘passive’ than renting out an apartment yourself.
All of that might sound pretty good. But as I see it, there are some potential issues with getting started in listed property investment today – especially if investors want to take a diversified approach through ETFs or managed funds rather than investing in a single listed property company.
The potential problem stems from the incredible rise of a company that owns excellent assets, has been managed very well, and whose shares have performed very strongly. I am, of course, talking about Goodman Group (ASX: GMG).
Goodman Group executes a build, buy and manage strategy in the industrial real estate sector. In other words, Goodman develops its own warehouse, data centre and logistics projects. It also buys existing properties from other developers and investors, and invests in these areas on behalf of long-term investors like sovereign wealth and super funds.
In recent years, Goodman has become increasingly focused on data centres, which now make up almost half of its development pipeline. As data centres have become one of the hottest assets in real estate thanks to rising AI adoption, Goodman’s value has surged as investors expect significant growth.
Here how $100 invested in Goodman over the last few years would have fared versus a real estate index tracking ETF.
Goodman has performed so well in recent years that it now comprises around 40% of Australia’s real estate index. In my eyes, this poses three main issues for investors looking to get started in listed property investing today.
1. Highly concentrated index tracking ETFs
ETFs tracking the Australian listed property index are not as diversified as investors might assume an ETF would be. Goodman has made up around 40% of the index for a while now, which makes the so-called magnificent seven’s weighting in the S&P 500 index look rather small.
2. Goodman looks expensive
Not only do investors in Australia’s REIT index have a lot riding on the performance of one company’s shares. The price of those shares looks rich compared to our assessment of underlying value. Even after a recent sell-off, Goodman trades almost 25% above our analyst’s Fair Value estimate.
3. Active funds are also very heavy on Goodman
Most managed funds in the Australian property space are also loaded up to the gills on Goodman. This includes all of the Australian property funds with a Gold medalist rating from us, which are underweight but still have 30%+ exposure to this one company. Does this reflect the career risk of massively underweighting an index heavyweight?
Figure 2: Passive and active fund weightings in Goodman as of December 31 2024. Source: Morningstar
I think these issues have the potential to detract from some of the benefits of publicly listed property that I mentioned earlier. Especially the potential to achieve diversified exposure to the asset class in one investment.
Goodman’s high valuation and dominant weighting also makes the index itself look pricey at a time when valuations in several other real estate assets look rather interesting. Of the 15 ASX real estate securities we cover, for example, eight have a Star Rating of four or more out of five.
I went searching for potential alternatives and found two interesting options.
Van Eck Australian Property ETF (MVA)
The first alternative I found was Van Eck’s Australian Property ETF.
Instead of replicating the market cap weighted ASX 300 REIT index, this ETF replicates the MVIS Australia A-REITs Index. This index tracks the ASX’s largest A-REITs but only puts a maximum of 10% in each company.
This results in a much lower weighting to Goodman and a more diversified portfolio, albeit one that would be considered rather concentrated by most other standards. Here are the ETF’s top ten positions as of January 28:
The ETF has a Bronze rating from our manager research team, who note that its construction (which requires a market cap of over $150 million and minimum daily trading volume) still leaves it highly concentrated with no exposure to much of the opportunity set.
Indeed, the fund currently lists a total of 15 positions compared with 31 holdings for Vanguard’s Australian Property Securities Index. So while the fund does appear to offer more of a spread between Australia’s biggest public real estate firms, it does have less exposure in some areas.
In another departure from the benchmark, the fund appears to be weighted far more towards mid-cap and value names. The portfolio sports a trailing dividend yield of 4.97% according to Van Eck’s latest marketing material, which is a fair bit higher than the index’s trailing yield of around 4.2%.
Cromwell Phoenix Property Securities
Another option I was alerted to was Cromwell’s Pheonix Property Securities managed fund, which – it must be said – does have a slightly higher barrier to entry due to its $10,000 minimum starting investment.
The Phoenix fund’s “benchmark agnostic” approach stood out to me, given the questions I’ve risen about what the index offers investors today. This is reflected by a big underweight in Goodman (16% rather than 40%) and holdings in several smaller companies not found in the benchmark.
Our manager research team have a Neutral view on the fund, as its higher management fee offsets Above Average ratings in the People and Process pillars of our fund rating methodology.
“Cromwell Phoenix Property Securities is willing to depart substantially from the benchmark with an investment universe broader than most rivals, including substantial holdings in less researched small-caps” says Zunjar Sanzgiri’s report on the fund.
Sanzgiri continues: “From its universe of about 75 companies, the fund homes in on three parameters: an understandable business and financials, robust governance that aligns the interests of company managers with shareholders, and a discounted share price to estimated valuation.”
I’ve listed the fund’s top 10 holdings as of October 31st 2024 below. If my calculations are correct, the fund’s trailing 12 month yield at the recent buy-in price was around 4.75%.
The Phoenix Property fund commands a 0.96% annual management fee, which is higher than the 0.25% per year for Vanguard’s passive option and 0.35% per year for Van Eck’s ETF. That does seem to get you genuinely active research and management in return, though.
Goodman’s strong performance has made it all but impossible for Phoenix Property to outperform the index recently. But it has beaten this yardstick by a handy margin since its inception. If the Goodman juggernaut hits a bump in the road, could the Phoenix rise again?
Closing thoughts
I am not making a market call on Goodman or the REIT index here. Indeed, if Goodman keepings performing so well, those investing in the index will be delighted that it has such a big weighting.
All I am saying is that by looking a little further afield, investors might be able to find investments with 1) more diversification 2) more income, if that is what they are looking for and 3) more exposure to assets at lower valuations.
As always, any investment should only be weighed up in the context of a broader investing plan. Go here to read my colleague Mark LaMonica’s four step guide to setting your high level strategy.
