SYDNEY • Australia's overheated property market has spurred one of the nation's top-performing fixed income money managers to cut some of its real estate debt investments to the lowest level since the 2007 financial crisis.
Mr Vivek Prabhu, head of fixed income at Perpetual, is making the move as he braces himself for potential blow-ups in the nation's A$7.6 trillion (S$8.14 trillion) property market.
He has whittled down the debt holdings of Australian real estate investment trusts within the A$926.4 million Perpetual Wholesale Diversified Income Fund to 2.9 per cent from a peak of 14.8 per cent in 2014.
"Looking at the property cycle - both the residential and commercial - we're probably closer to the top than to the bottom," Mr Prabhu said in an interview. "The risks are increasing but the compensation for that risk, or the credit spread, hasn't really moved out."
Last year, Australia's housing values rose at the fastest pace in seven years, fuelled by record-low interest rates that emboldened buyers to pile on more debt. The nation's residential property has attracted billions of dollars from investors, including those from China, despite warnings that heady price increases in recent years may be unsustainable.
Prices are expected to continue climbing this year, driving up household debt levels and worsening the financial risk of borrowers in the event of an interest rate hike, Fitch Ratings said in a report dated Jan 15.
Loan delinquencies have also been on the rise in mining-focused states such as Queensland and Western Australia following a slowdown in the commodities sector, according to data from Genworth Mortgage Insurance Australia.
"In a rising rate environment where all asset classes were inflated by falling rates, the property sector is one that comes to mind as being exposed," Mr Prabhu said.
The Wholesale Diversified Income Fund returned 4.28 per cent in the one-year period to November, more than double the Bloomberg AusBond Bank Bill Index's 2.12 per cent in the same period.
Perpetual, which Morningstar ranked the top-performing fund manager for Australian fixed income during the year to October, invests just over A$5 billion of its A$6.1 billion debt portfolio in company and financial bonds and asset-backed securities.
Mr Prabhu ramped up the diversified income fund's investments in financials and corporates last year, and he said that has helped.
The fund holds notes issued in various currencies by Australia's big-four banks, Citigroup, HSBC Holdings, Sydney Airport and supermarket owner Woolworths, among others. Debt issued by Australia's largest bank by market value, Commonwealth Bank of Australia, contributed some of the biggest gains for the fund last year, according to Mr Prabhu.
The fund's investments in bank and financial paper have almost trebled to 37.3 per cent this month from 12.9 per cent in July 2006, he said.