PGIM India Mutual Fund (PGIM India) is launching a global Real Estate fund of funds (FoF). The NFO is open from November 15 to 29. This is the second such fund after Kotak International REIT FoF (Kotak REIT FoF) that was launched in December last year.

About the fund

The open-ended PGIM India Global Select Real Estate Securities FoF (PGIM India REIT FoF) will invest in units of the international PGIM Global Select Real Estate Securities (PGIM GSR).

PGIM GSR primarily invests in REITs and equity and equity-related securities of real estate companies located throughout the world. It is benchmarked against the FTSE EPRA/NAREIT Developed Index.

Portfolio and performance

As of September 30, PGIM GSR had heavy exposure to North America with the region accounting for around 62 per cent of its portfolio. Japan, Europe (excluding the UK), Pacific Rim (excluding Japan) and the UK accounted for 12, 11, 8 and 6 per cent respectively.

In terms of sectors within REITs/real estate, the top 5 segments were Residential (23 per cent), Industrial Property (20), Diversified (22), Retail (11), and Hotels/Resorts & Entertainment (10). Unlike the case of geographic exposure, the deviations from the benchmark are higher when it comes to sectoral allocations and this is likely to be one of the main factors that would define its performance versus the benchmark. The top 5 holdings of the funds were US based logistics REIT Prologis (6.4 per cent), Healthcare REIT – Welltower (6.3), Residential REIT – Equity Residential (4.8), Industrial REITs – Life Storage (4.4) and Rexford Industrial Realty (3.9 per cent).

In terms of performance, since its inception in December 2015 to September 30 2020, it has given net annualised returns of 6.9 per cent. On a 5-year basis it has returned 6.63 per cent (net annualised) versus the benchmark’s 4.53 per cent. However according to PGIM India, PGIM GSR changed its investment strategy last year to track and replicate the performance of another better performing real estate fund of PGIM. If the same was done since inception, the 5 year gross annualised returns would have been 12 per cent ( assuming 2 per cent fees, net return of 10 per cent). All returns are in US$ terms.

As per data in the NFO presentation by PGIM, REITs can be a beneficiary of rising inflation in the US. But data in the presentation shows that this the case only when inflation is between 3 and 4 per cent. Recent CPI inflation in the US was at 6.2 per cent (highest in 31 years).

Wait and watch

While jury is still out on whether the inflation is caused primarily by supply-side disruptions and may dissipate- for now it is well above the range under which REITs have convincingly outperformed other asset classes.

This apart, with extreme low yield environment since March 2020 and surplus liquidity, most of the yield assets like REITs have also rallied from then on, as investors made a rush for higher yields.

If global interest rates start rising faster than expected (quite possible, given current inflation trends) and at the same time this causes growth shocks, higher treasury yields would require REITs to offer even better yields to compensate for risk. But if business growth does not pan out as expected in 2022, this could lead to a fall in the REIT share prices for the yield spreads over treasury to adjust. Another factor to consider is that REITs are leveraged entities and hence, how interest rate increases will impact profitability will also have to be seen.

REITs offer good diversification/ lower correlation with equities and also provide annual income (yields) with potential for capital appreciation. Hence investors can consider this FoF at better entry points which are likely next year, letting the current uncertainties play out. We had recommended similar wait and watch approach to the Kotak REIT FoF, focussed on Asia Pacific REITs.

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