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Investing
Should investors ditch Aussie property trusts?
Fiona Harris - July 31, 2008
 The Australian property trust sector is the worst performing in the world.
Year-to-date returns as at June this year had returns from the sector at -30.4%. This was worse than Asia (-28%), Europe (-18) and the US (-11.3%).
“Everyone has copped a bit of a pounding,” says Dugald Higgins, associate director, PIR Independent Research Group. “But the Australian market has suffered most.”
Colonial First State’s head of property securities John Snowden agrees: “The sector this year has been pretty dreadful.”
Reasons behind the downturn
Experts say while even some property trust managers blame the sector’s downturn on the international credit crisis, this is a simplification.
Rather, they say it is the result of a combination of inter-related factors, namely the growing complexity of trusts, their increased use of gearing and greater international exposure.
“Listed property trusts have been seen as a safe haven but they have become more complex,” says Higgins.
Techniques such as stapling which links the units of property trusts to the shares of companies which they are closely associated, has made the sector more complicated. So too has the range of assets in which property trusts invest.
“They’re not just involved in 100% rent,” says Higgins.
Also affecting the sector’s performance has been the increased gearing levels used by property trusts.
Since 1994, Higgins says listed property trusts have increased their gearing from 10% to around 40% while unlisted property trusts gearing levels have generally remained at 50-60%.
This gearing has had negative implications for the sector with the credit crisis.
The role of the credit crisis
With 90% of local trusts owning offshore assets, the investment conditions overseas do impact on the sector’s performance.
“A lot of groups are big enough to go overseas and it’s not inherently a bad thing,” says Higgins. “But a wider pool can lead to more risk.”
The sub-prime market crisis in the US, where banks and financial institutions such as Fannie Mae and Freddie Mac have incurred huge losses, has caused ripple effects over to property trusts.
Snowden says the high gearing levels if property trusts together with the closure of debt markets, has forced many trusts to seek financing from the same institutions that have suffered the losses.
However at the time when property trusts are looking to reduce their gearing levels, banks have changed their lending practices, making financing difficult to obtain.
“The banks have become more conservative on debt so there is a type of liquidity drought,” says Snowden.
To create liquidity, trusts have been forced to either sell off their assets or pay out reduced distributions.
Centro Properties group recently sold 29 retail shopping centres in the US for $714million, a 10% discount to the book value.
Meanwhile other trusts such as Mirvac announced in mid-June its plans to downgrade profits, a decision the market welcomed.
“What the market liked was that they had adopted a fairly conservative approach by just paying out earnings of the profit portfolio,” says Snowden.
Disaster spells opportunity
While experts say an investor’s individual circumstances are the best guide to the course of action to take, there is a silver lining to any downfall.
“You have to come back to the time horizon of an individual investor,” says Snowden. “Assuming you have got a medium-term time horizon now is actually a great time to invest.”
Higgins agrees: “I think long-term there is alot of opportunity out there. If you’re willing to commit to 3-5 years, people will look back and say, hell that was cheap.”
He adds: “Property is a long-term vehicle. Now is a time for conviction.”
But investors do unfortunately have a tendency to bail out when markets are down and as a result, simply crystalise their losses. They then stay out of the market long enough to miss the inevitable upswing.
“If you don’t have to sell, why would you?” says Higgins.
Is the end in sight?
There are optimistic signs that the sector’s recovery might not be as long as first expected.
Snowden says already three-quarters of the holders of sub-prime mortgage securities have repriced.
“When the last quarter reprice, most of the bad news will have been delivered. When this flows through, the banks should adopt more liberal lending policies and this will create liquidity.”
“We are close to the bottom of the market and the fundamentals are quite strong,” he says.
However historical comparisons are also a useful guide.
“It took Stockland 3-4 years after the crash in 1987 and GPT (General Property Trust) took until 1993,” says Higgins. “You could argue that this recovery will be quicker. There is alot of cash sitting on the sidelines but we need some stability in equity markets.”
More articles from this edition of CompareShares:
Stocks: Our undervalued tech sector – cheap tech stocks with a future
Investing: Should investors ditch Aussie property trusts?
Ask the Expert – Forex: Steps to help you build a winning trading strategy
Economics: Edging toward the precipice for US economy
Property: Pay off your mortgage in record speed
Mortgage: Bush signs massive housing rescue bill
Companies: ABC Learning to write down $213m
Housing: House prices fall in most capitals
Business: Bassili sent to jail for three years
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