Listed property market at turning point

Listed property trusts (LPTs) have arguably been one of the best performing asset classes over the past three years, but with the recovery on international share markets gaining momentum and interest rates expected to rise, they are no longer being regarded as a premium value proposition.

While listed property is expected to continue producing steady yields, there is a general belief that over time investors will look to better returns from equities.

The head of listed property withDeutsche Asset Management, Andrew Stubing, says that notwithstanding the current steady and at times better than expected performance of LPTs, he’s not expecting any major growth in the sector.

“Property is not likely to go up much further from here,” he says.

It is a sentiment echoed byMacquarie Bankequities strategist, Tim Rocks, who says he believes LPTs are at a turning point after having “done spectacularly” for the past three years.

“But I think we’re at the end of that period now and people are going to be a little more adventurous,” he says.

The dynamics influencing the likely outflow of funds from the listed property sector are explained by a recent Rothschild Australia analysis that suggests income distribution levels are likely to increase only slowly over the medium term.

Rothschild estimates distribution growth to average 2.5 per cent a year over the next two years. This compares to Rothschild's estimate of 8 per cent a year earnings growth for industrial shares over the same period.

It says property trust distribution growth is slow, largely due to the current low rate of inflation. Also, leases were put in place in the late 1980s at rents that were much higher than today's market rents. These will only start growing once the market has caught up.

This outlook is put into perspective when it is considered that listed property trusts have been the best performing major asset class over the past three years.

The Property Accumulation Index, representing listed property trusts, scored an average annual return of 14.71 per cent in the three years to December 31 last year.

However,InvestorWeb Research’s managing director Martin Kerr says that while the level of growth in the sector might not be as robust as it has been in recent years, he nonetheless it will continue to do well.

He says that while there are some risks associated with listed property, he does not believe the risk of a bubble developing has ever been significant.

Kerr points to the fact that quality property continues to be in short supply and the degree to which overseas property is being added to portfolios as an indicator of the ongoing health of the sector.

He says while he expects continuing positive yields from listed property, he is not expecting the sort of double digit growth seen a few years ago.

Kerr says that with the rebound in equities he expects to see at least some money leave the sector but that he does not expect the outflows to be dramatic.

Rocks says that while listed property has done well over the past three years it has to be clearly recognised as a defensive asset class — somewhere people “parked” their money until more attractive investment options became obvious.

He says that as equities and other, more attractive investments emerge, he expects we will witness some outflows from listed property.

“A lot of people have been waiting for the rebound in equities,” Rocks says.

However he acknowledges that listed property has been good for investors and, in comparative terms, has performed particularly well generating absolute returns of between 15 and 20 per cent.