New look at listed property trusts (REITS)

By Pam Walkley,
Money Magazine, September 2007

Listed property trusts (LPTs) form Australians' third most popular asset class — not surprising given they have on average provided a spectacular 17 percent total return each year for the past 10 years. But now the sector is suffering in the wake of the shake-out from sub-prime loan crisis and rising interest rates. This year returns have gone backwards. In June alone the sector was down 5.1 percent.

Investors are asking if this is the end of the dream run for LPTs. Going back to basics, these vehicles were originally established as income producers, buying large commercial real estate assets, collecting the rent from tenants in these buildings and passing it on to investors in a tax-effective way.

But the sector has changed dramatically over the past few years, with many LPTs taking on added risk through property development and funds management. These vehicles are called "stapled" trusts. Average gearing (borrowing to invest) levels have also increased in LPTs, and many now also have exposure to international real estate as well as local.

Indeed, the sector is now very diverse, and different LPTs produce vastly different returns, as is highlighted by research produced by Adviser Edge showing first-quarter total returns for 2007.

Becton Stapled (BEC), which invests in retirement assets, had the highest at 37.17 percent, and Centroret Staple (CER), investing in retail assets, the lowest at -15.54 percent.

Despite all these changes, the sector still derives 86 percent of its income from property rental, with around 64 percent from domestic property, says a report from Standard & Poor's.

So is it time to sell or are there good buying opportunities? Some, such as financial planning firm Bridges, say investors should take their profits and pull out of the sector.

Others, such as leading economist Frank Gelber from economic forecaster BIS Shrapnel, argue LPTs are just going through a flat patch and will surge again, because property markets will be strong over the next few years.

Most analysts expect the sector to continue to produce sound income returns. After all, the fundamentals are still strong, given a surging economy and high employment which means growing demand for commercial space. But the sector is predicted to produce much more modest total returns this year, likely to be around nine percent.

"The sector has maintained strong financial profiles and continues to build on established track records for managing risk and growth," says a July report from Moody's Investor Services, which has a stable outlook for the sector.

"If you are a long-term investor who has chosen to invest in LPTs, a fall in their price should not really be an overwhelming concern," says Ian Irvine, ASX head of customer and business development equity markets.

"After all, commercial property rents have not fallen and vacancies have not risen and the underlying income streams remain."

Irvine says many people still buy LPTs for long-term income. "Capital gains are fine, but are only realised when you sell." Now that yields are up and prices down, this will make them a more attractive buy for some investors, Irvine says.

But, as with any investment, you need to carefully examine the entity you are planning to invest in. Look at things such as:

* Where it owns its assets.
* If it's stapled, and if so, what to?
* What sector? Is it a diversified vehicle?
* Whether it borrows locally or overseas.

Australia was the first country to securitise commercial property in a big way through listed vehicles. Now REITs (real estate investment trusts), as LPTs are called overseas, are expanding into many countries including the UK and Asia.

http://money.ninemsn.com.au/article.aspx?id=296449

Key points
LPTs form Australians' third most popular asset class
The sector still derives 86 percent of its income from property rental