Volatility makes property stocks funds a hard sell

STOCKHOLM (Reuters) - Property equities funds could see capital inflows dramatically curbed if volatility in global real estate shares continues to grow, the head of Fidelity's $250 million Global Property Fund told Reuters.

Steve Buller said volatility had reached disturbing levels, making it hard to promote real estate as a defensive asset class.

"When we started running the U.S. REIT (real estate investment trust) fund in 1998, there was very seldom a day when the REIT market would move 20 or 30 basis points either way.

"Now we see intraday movements in stocks or even indices of 8 percent. This is a dichotomy to the underlying business," he said in an interview on the sidelines of the European Public Real Estate Association (EPRA) conference.

Buller said the surge in real estate stock market volatility was making it harder for funds to stick to longer-term strategies.

On average, he said Fidelity looked to hold stocks for between 18 months and five years, leading to a annual turnover of stocks of between 20 and 40 percent.

But sharp price movements in either direction meant the fund was being forced to trade more frequently, either to exploit volatility or defend against it.

"The real estate sector has more volatility than technology stocks and technology is a short-term, non-cashflow business, where products can have six month's shelf life," he said.

INVESTMENT INTERESTS

Buller said Fidelity's stock selection was based on the alignment of strong market fundamentals, stable and growing valuation characteristics and positive technical factors like access to capital and management.

The Global Property Fund is invested 40 percent in the United States, less than 10 percent in the UK, around 10 percent in Australia, around 10 percent in Japan, about 13 percent in Hong Kong listed and mainland Chinese stocks and around 5 percent in Singapore, with the remainder in emerging markets such as Brazil, the Philippines and Russia.

Its top individual stock picks include Westfield (WDC.AX), Unibail Rodamco (UNBP.PA) and Mitsubishi Estate Co (8802.T).

In contrast to some competitors who were eyeing up Indian or Chinese property stocks, Buller said the emerging market he was most excited about was the Philippines.

"Their population is 88 million, of which 10 million people work overseas, remitting back $24 billion back ... every year," he said.

"So that has been a stabilizing force for the economy and really benefited the property sector, especially residential," he said, adding that an outsourcing boom had also boosted office demand in Manila.

He also said he remained a fan of U.S. listed property stocks, particularly apartment owners, as struggling homeowners once again became solid apartment renters.

"Nine years ago the home ownership rate in the U.S. was 64 percent, 18 months ago that was 69 percent and in the last 18 months that has dropped to 67.5 percent. Given what will happen to foreclosures, that will only continue to go down," he said.

With greater potential for longer-term dislocation in debt markets, Buller said he remained cautious about Europe. "We selectively own UK and continental European property shares and we're underweight in both," he said.

But Buller said the UK was ripe for M&A which could shore up flagging real estate stocks. "If there's one market where there could potentially be M&A, it is the UK. There's a lot of people rubbing sticks together to see if they can start fires.

"We're yet to see something consummated but many of the people looking at the UK right now -- Limitless, GIC -- they don't need a debt market to complete transactions. The UK market is better poised than any other."

(Editing by David Holmes)