GUEST ARTICLE: Until recently the Australian Property Trust sector was seen by many investors as a medium-risk investment with a solid income stream and a good hedge against high-risk share investments.
What they didn’t realise was that highly leveraged property trusts like Centro would get in trouble when interest rates rose, liquidity evaporated and property trusts couldn’t rollover their expiring loans.
The property trust index (XPJ) fell by a greater percentage than the ASX 300 as a whole and is currently down about 40% from its peak last year. Tim Hewson from Raboplus discusses some of the reasons for this precipitous fall.
The rise and fall of the Australian listed property sector has certainly been one of the more interesting stories of the past few years and its recent and dramatic fall from grace has installed doubt, fear and scepticism across the market.
Known previously as Listed Property Trusts (LPTs), Australian Real Estate Investment Trusts (A-REITs), are Australian Stock Exchange (ASX) listed trusts that provide investors with exposure to retail, commercial, industrial property and their management businesses.
Whilst there are many benefits to investing in property via A-REITS, recent market developments have clearly indicated that there are also significant risks.
Most notable are the significant losses experienced by this sector which resulted in a very large wedge being driven between investors wanting to invest in property and those who may have confused A-REITS with the type of ‘bricks-and-mortar’ safety they would normally feel when buying the family home.
Confusing the two has proven to be a big and very costly mistake!
After the rapid rise of the sector since 2004, its 10 year bull run came to an abrupt halt with the market capitalisation of A-REITS now reduced to $81 billion, down 41.2% for the 12 months to June 2008.
This massive decline in the value of the sector negating the gains of the past 4 years and returning the market value back to its 2004 levels.
David Potts from the Sun Herald recently wrote that the performance of the sector had “changed irrevocably from the blue-chip certainties they once were”.
Now clouded by rumour and innuendo, as well as the affects of the global credit crisis and rising interest rates, it has become virtually impossible for many A-REITs to raise cost-effective public finance for what is already a massively leveraged segment.
The result has been significant losses across both stapled securities and unit trusts.
Of the stapled securities, for the 12 months to 30 June 2008, household names like Centro Properties Group (CNP) were down 97.11%, GPT Group (GPT) down 48.45%, Mirvac (MGR) down 44.01% and Stockland (SGP) down 32.14% over the same period.
And the unit trusts didn’t do much better with Centro Retail Group (CER) down 81.41%, Australand (ALZ) down 38.35%, and Multiplex Acumen Property (MPF) and Westfield Property Trust (WDC) down 39.37% and 26.46% respectively for the 12 months to end of the financial year.
So whilst the US driven sub-prime crisis may have been the initial catalyst causing the significant losses now experienced by the sector, decreasing property values, a reduction in consumer spending, decreasing business investment and confidence as well as massive over-leverage within the sector have all played their role.
A-REITs are also a heavily polarised sector with the top 10 accounting for more than 80% of the total market. So for market that is more than 40 years old with only 69 A-REITS to choose from, one would normally look overseas for diversification into this sector.
According to Morningstar, roughly 40% of the assets of the A-REITs sector are already global. More recently, local fund managers have typically increased their allocation to global listed property by as much as 20% with most managers focusing on opportunities in Asia and Europe.
However, as the larger A-REITs have the capacity to invest overseas, they also face several other risk constraints. Most notable is of course the recent rise of the Australian Dollar to a 25 year high of US$0.9849.
Yet, the market, and in particular investors, are still incredibly fearful of the global credit crisis, rising debt levels and reducing cash flows.
So whilst the dust continues to settle on the Australian listed property sector, one thing is for certain – listed property is no longer the high yielding income and defensive safe-house investment offering the potential for long-term growth that it used to be.
This article was written by Tim Hewson, Senior Manager – Investments and Managed Funds, International Direct Banking at Raboplus
Tim has more than 12 years experience working in banking and financial services including Raboplus, specialist boutique investment firm Absolute Capital Limited and the Commonwealth Bank of Australia.
You can read more articles by Tim at his own blog, Confident Investor where he discusses topical financial issues and at the Raboplus Investor Centre where Tim writes a monthly hot tips column giving his opinion and commentary about investing and what’s happening in the market.
EDITOR: You can watch a video below from the ABC’s “Inside Business” program from a few days ago titled: “Credit crunch hits property trusts hard”
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