Thames River says property stocks still in peril

LONDON (Reuters) - Stock-buyers are back in love with high-flying European property shares even though more market drama looms large over the debt-sensitive sector, a real estate hedge fund manager at Thames River Capital told Reuters.

The inevitable withdrawal of monetary stimulus and the niggling potential for economic relapse are holding the recent bull-run to ransom, making it tougher for hedge funds to implement alpha-seeking strategies, manager Christian Roos said.

"Make no mistake. We're still in a beta market. It's about owning the market or not owning the market in our subspace," said Roos, who manages Thames River's Longstone Fund.

Alpha returns are those generated by management skill, while beta returns are those driven by broader market movements.

"Volatility has been running at 45 percent on real estate securities up until the summer, almost in line with the banks. We are a sub-sector of financials. The credit instability that comes with that is in the fabric of our industry," he said.

The FTSE/EPRA NAREIT Europe index, which tracks Europe's biggest property firms, has surged on signs of stabilisation in global capital markets, rising by about 40 percent since July.

Data from research house Data Explorers shows the volume of property shares outstanding has fallen by 46 percent in the past year, implying thinner appetite for short-selling as bricks and mortar prices start to rise for the first time since mid 2007.

Short-sellers borrow shares of companies, usually from other shareholders through a brokerage, and then "sell" these shares in the hope to buy them back at a lower price later.

Roos said the Longstone Fund was net long because he felt the current phase of asset reflation would be extended by investors in search of higher-yielding investment.

However, this same reflation would eventually encourage governments and central banks to shrink economic stimulus support and raise interest rates, triggering a new phase of uncertainty for stock markets.

"Up to now, most of economic data points to a recovery that is quite anaemic but when that starts to change, we could see a very turbulent period for real estate," he said, adding banks could start foreclosing because of interest coverage worries rather than loan-to-value covenants.

Roos said the positions in the Longstone short-book were not absolute return plays, but more risk management investments in high-beta stocks -- those with a high correlation to market movements -- with small cash flows that were likely to react quickly when the market dips again.

"These stocks will buy us time and insulate our return until we can reduce our net positions by selling the index," he said.

PERFORMANCE

Longstone produced a 1.92 percent net return in September, driven by long positions in Swedish residential developers and pan-European retail landlords.

"Relative to the market, our performance has been very strong," Roos said. "If we look at performance including September from when we launched in November 2007, the EPRA index is down 40 percent and the fund is up 16 percent," he added.

The fund has delivered positive performance in all but four calendar months since inception, a characteristic that is drawing 3-4 million euros of monthly inflows and enticing more investors to include hedge funds in their portfolios.

"We launched the fund in the middle of a storm and people have been cautious, they haven't been throwing money in left, right and centre like they did three years ago. A few of our competitors have disappeared," said Roos.

"But people are starting to warm to concepts that give them 'X' percent of the upside while sparing them from the majority of the downside," he said.

"When the market is rising, investors have to remember they are getting risk adjusted returns, they are paying for safety nets."

(Additional reporting by Daryl Loo; Editing by Andy Macdonald)

(See www.reutersrealestate.com for the global service for real estate professionals from Reuters)