Australia’s LPT market set to go global

Stuart Stuckey knows that his time in the sun will eventually have to come to an end.

Like most Listed Property Trust (LPT) managers, the BT executive vice-president has seen the property securities sector in Australia transform over the past year from one of relative obscurity, to one on the point of stardom.

And the transformation has been one built entirely around performance.

In the 11 months to the end of May 2002, the LPT sector in Australia returned 14.7 per cent to investors, an almost unfathomable distance ahead of other asset classes such as Australian equities, which returned negative 0.5 per cent, and international equities, which returned negative 19.2 per cent.

As a result, the flow of funds from retail investors into property trusts, according to Assirt, jumped from $79 million in the three months to June 2001, to $181 million in the three months to September 2001, to almost $350 million in the three months to December 2001.

But as Stuckey will no doubt attest, the unyielding popularity of LPTs has meant the sector is now grappling with issues of size and capacity.

In fact, many property analysts are beginning to question whether there are enough good properties left in Australia in which to invest the growing pool of money being placed into LPTs.

The situation is driving many of Australia’s LPTs to increasingly look offshore for solid investment opportunities.

It may come as a surprise to many who invest in LPTs listed on the Australian Stock Exchange to find that their money regularly ends up as the down payment in the acquisition of overseas properties, predominantly in the US and New Zealand.

In fact, 26 per cent of all monies now flowing into the LPTs that make up the Australian listed property index are invested offshore.

“A lot of domestic property trusts have been active in international property markets. If you invest in the LPT index in Australia, more than one quarter of your money will be invested offshore,” Stuckey says.

However, it is not only LPTs themselves that are increasingly looking offshore to satisfy what has been an unbending desire by local investors for exposure to property securities.

Many fund managers that offer listed property securities funds are also casting a closer eye over LPTs listed on overseas exchanges.

The allure of offshore listed property securities for home grown fund managers is in part a reflection of the local market.

In the eyes of many analysts, the Australian listed property market is, by world standards, a mature one.

Property trusts listed on the Australian Stock Exchange, for example, now acccount for up to six per cent of the All Ordinaries Index.

In the entire top 500 stocks on the US stock exchange on the other hand, there are only two so-called Real Estate Trusts (RETs), accounting for only a tiny portion of the S&P 500.

The comparison, for many analysts, is poignant, suggesting in no uncertain terms that the latent potential for growth in LPT stocks in a market like the US far exceeds that of their counterparts in Australia.

According to Stuckey, the potential in some offshore listed property markets will eventually lead Australian funds management groups to develop property securities funds for local investors made up entirely of offshore LPTs.

Stuckey says some of the larger superannuation funds are already showing a high level of interest in such products, something that has not escaped the attention of Australia’s listed property managers.

“All the big [funds management] players are definitely looking at this sort of product,” he says.

However, for the moment at least, looking is all they are likely to do.

Despite what fund managers may consider could be a hot market for global LPT funds, there are still some question marks over the tax implications for such products in Australia. This means it may be some time before we see funds made up of offshore LPTs appearing on the investment landscape in Australia in any significant way.

Even so, the motivation for fund managers to continue to explore the possibility of added returns through offshore listed property trusts will only get stronger.

If there is one thing that property securities managers in Australia agree on, it is that local LPT funds are unlikely to emulate in the next year the type of stellar performance that lifted them to the top of most performance charts over the past 12 months.

This viewpoint stretches all the way to this year’sMoney Management/Assirt Property Securities Fund Manager of the Year, UBS Global Asset Management.

The group’s head of equities, John Snowden, is the first to admit that the performance of LPTs over the past year has had as much to do with an environment of tumbling interest rates and shaky equity markets as it had to do with the skill of individual managers.

But, with interest rates now on the way up and some evidence of a more positive outlook for equity markets, it is no surprise that Snowden is forecasting a slightly more subdued year for local LPTs.

“If you believe that [economic] growth rates will increase and interest rates will be on the rise, then it will be difficult to see property outperforming other asset classes. But if you think that economic conditions are still variable, then you have to conclude that the performance of property will remain competitive,” Snowden says.

Most analysts are now predicting returns from the local LPT sector of between eight and 11 per cent over the next year. In other words, solid, if not overly spectacular, performance.

That will, according to BT’s Stuckey, more than likely push LPT managers back into their more familiar position well outside of the limelight.

No doubt, many of them will use the time to take an even closer look at what is happening in LPT markets around the world.