Funds GreatLink - Great Eastern Life

GREATLINK GLOBAL REAL ESTATE SECURITIES FUND report as at 31 December 2005
rising over the past six months. The sale of two buildings owned
by Mori Trust in late December, to U.S. insurer AIG at record
prices, boosted sentiments further.
In Australia, property trust returns for the year were constrained
by interest rate concerns, relatively large volumes of equity issuance
and narrower investment spreads that made accretive acquisitions
difficult. However, property markets have been well-behaved with
fundamentals improving in the office and industrial markets and
holding up in retail despite slowing retail sales growth.
Over the period, the overweight position in Singapore was
retained in view of its early stage of recovery while the initial overweight
in Hong Kong was adjusted to reflect concerns over the rising risk
of higher Hong Kong interest rates. The Fund added to the exposure
in Japan as data released pointed to a sustainable recovery for the
economy. To fund this, we reduced our exposure to Australia.
MARKET OUTLOOK
Europe and US
The U.S. economy grew comfortably in 2005 with annual GDP
growth expected to be well approximately 3.6% and an additional
2 million jobs added to the work force. 2006 U.S. GDP growth is
forecasted to be 3.4% based on a composite of leading economists.
An environment in 2006 of stable interest rates and economic
growth bodes well for real estate fundamentals and earnings growth.
Real estate securities, based on dividend yield and earnings
growth, still appear attractive relative to bonds and general equities
and continue to appear attractive relative to net asset value. In
2006, we expect further mergers and acquisitions to occur in the
sector as demand for commercial real estate from pension funds
and private investors continues. We expect the private sector bid
to keep the net supply of new stock relatively stable. Gross equity
issuance for U.S. real estate securities totaled approximately $28
billion in 2004 and 2005, well off from the peak issuance years of
1997 and 1998, when equity issuance totaled over $40 billion.
Privatizations in 2004 and 2005 removed approximately $13.1
billion from the North American public security investable universe.
We believe building costs will continue to escalate above
inflation in 2006; while this will prevent some speculative new
supply, we continue to believe the return requirement for
development from institutional investors will remain low compared
to historical standards resulting in “normalized” levels of new real
estate supply. We view the primary risks to real estate securities
in 2006 as un-anticipated increases in interest rates, capital flow
rotation out of value stocks to growth stocks and a leveling of
the relative attractiveness versus stocks and bonds.
In 2006, we continue our retail, hotel and industrial overweights,
as we believe they continue to offer the best combination of
earnings growth and reasonable valuations in a period of continued
economic growth. Regional Mall and Hotel companies have
tremendous pricing power and some industrial markets are
switching from tenant pricing power to landlord pricing power.
We remain underweight but opportunistically selective in the
office sector and multi-family sector. In the office sector we
continue to see landlord pricing power in certain markets,
particularly New York, Washington D.C., and Southern California,
however, we believe it is still a tenant driven market across most
of the sector for 2006 and we expect to get more visibility on
pricing power in the middle of the year. Another year of 2 million
new jobs created should position the office markets well for a
2007 recovery. We believe multi-family companies will provide
reasonable relative earnings growth in 2006 and perhaps a few
upside earnings surprises; however, we believe that current
valuations accurately reflect growth prospects and believe the
condo conversion premium embedded in many multi-family net
asset values will begin to abate in 2006. We also continue to add
Canadian real estate securities to the portfolio as relative valuations
began to look attractive after a recent pullback.
In Europe, capital flows into private and public real estate are
expected to remain strong. We see continued rental growth and
recovery in some European office markets, particularly London and
Paris, additionally Madrid. We are closely monitoring the interest
rate environment in Europe after the recent European Central Bank
rate increase and currently favor companies that can create value
through leveraging institutional equity capital, strong development
and re-development pipelines and companies that benefit from the
higher growth economies of Eastern Europe. We are more cautious
on the U.K. given the recent price run up in anticipation of REIT
legislation, though we do anticipate that REIT legislation will be
passed in either the UK, Germany or both in 2006.
Asia
The Hong Kong property market is watching intently for a
peaking in interest rates which had caused transaction volumes
to decline markedly during last year. The market expectation is
that interest rates are close to a peak and the pent-up demand
produced thus far will create a positive environment for Hong
Kong property prices. The office segment will do well as continued
strong office demand is boosted by a new high in hiring intent, at
a time when vacancies are at or below critical levels and no large
completions are expected till 2008. Home buying activity will pick
up after the Lunar New Year as tight labour market and strong
pay raises work to edge up prices. Retail property prices are likely
to stay muted because of large rises already experienced in 2004.
In Singapore, the pricing strength seen mainly in the luxury
end of the market in 2005 should broaden out this year as the
cycle gains momentum with the resulting price rise likely to be
higher than last year’s. Prime office property should perform the
best within the property sector because of the weak supply
pipeline. One Raffles Quay, the largest office development in 2006,
has been fully taken up while the redevelopment of old commercial
buildings to cater to the demand created by the future integrated
resorts and casino, will further squeeze supply. The Singapore
retail segment will benefit similarly from the casino development,
with the upcoming supply at Vivio City expected to be well
absorbed. As for SREITs, the valuations and spread have become
more attractive and should do well going forward, particularly
when interest rates peak.
Australian property prices are expected to remain stable as
long as the unemployment rate stays low, and indications of
economic activity does not suggest otherwise. Industrials rents
may see some upside, a consequence of cost-push being experienced
by the economy. Overall valuations are seen as fair, given the
strength of performance since 2004, although increasing funds
flow into property securities globally, and ongoing potential for
value-accretive transactions are likely positives.
The outlook for Japan remains positive. Office rentals in
central Tokyo have shown signs of steady increases since early
2005, a noteworthy achievement considering the prolonged extent
of rental declines. Vacancy rates in good locations have come down
to below 5%, a level where bargaining power of landlords typically
becomes evident. The demand and supply outlook is also benign
with the supply pipeline over the next few years looking constrained
while demand is still in an early stage of recovery underpinned by
the firmer economic outlook. However, the residential sector is
less encouraging as housing starts are still not registering growth.
Over the medium term, this economy will likely experience inflation,
which could accelerate investments in property.
26 NOTE: This factsheet is compiled by Great Eastern Life. The information presented is for informational use only. The performance of the Fund is not guaranteed and the value may increase or
decrease in accordance with the future experience of the Fund. Past returns are not necessarily a guide to future performance.