Portfolio Manager Perspectives

Jeff Benjamin

Real estate offers income – plus growth: Prudential's Halle

Sep 23, 2010 @ 12:38 pm

By Jeff Benjamin

A two-pronged approach to the global real estate market can provide both growth and income in a diversified portfolio, according to Marc Halle, manager of the $425 million Prudential Global Real Estate Fund Ticker:(PURAX).

Mr. Halle currently has about 45% of the fund allocated to real estate investment trusts and real estate operating companies in Asia, where stronger economic growth is driving new development.

The income portion of the fund is mostly coming from the North American market, which represents almost 40% of the portfolio.

He also has about 15% of the fund invested in Europe, where the values are attractive but don't always come with the kinds of catalysts that drive prices higher.

“We try to create a barbell portfolio of income and growth to help us manage risk,” Mr. Halle said. “Across the U.S. today, rents have stabilized, which creates some good income opportunities.”

The growth opportunities are mostly concentrated in Asian markets such as Hong Kong and Singapore, but also include Brazil, Australia and Western Canada, Mr. Halle said.

An example from the income side is Public Storage Inc. Ticker:(PSA), which has a “very strong balance sheet and some growth opportunity,” he said.

The REIT is up more than 27% from the start of the year.

This compares with a 1% gain by the S&P 500 over the same period.

Another example of a strong U.S. REIT, Vornado Realty Trust Ticker:(VNO), includes a $30 billion portfolio of office and retail properties.

Vornado shares have gained 28% since the start of the year.

While the U.S. REIT market is still about 40% below its peak in 2007, the sector has risen a long way off the bottom it experienced during the worst part of the financial crisis.

Because the real estate market tends to lag the stock market, Mr. Halle prefers to focus on those real estate companies that have the most flexible leasing policies, one that enable them to raise rates as the market improves.

“We're looking at the duration [of leases] in the portfolios, because the sectors with the shortest lease durations are going to be the most attractive,” he said. “Think of hotels, for example, which can raise their rates on a daily basis.”

The ability to adjust leasing income is also what can make certain real estate investments a great hedge against inflation.

“Real estate is a hybrid between a stock and a bond, and we're still getting a good dividend yield, even if it is low compared to the historical numbers,” Mr. Halle said.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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