Bad behaviour in LPTs

Some listed property trust (LPT) fund managers are taking a short-term view on their holdings, which is affecting performance, APN Funds Management head of investments Michael Doble believes.

“Anybody turning over more than 30 per cent of their LPT portfolio a year just doesn’t get it,” he said.

“The long-term view is for generating income from the portfolio, as property leases are normally five years or more, which means property is a long-term investment.”

Doble said property is an illiquid asset, which means it needs to be held long-term to overcome the high transaction costs.

“Punting growth from property is risky,” he said.

“Taking long-term views are based on a buy and hold strategy that is used for investing for income.”

Doble said trading LPT portfolios on a regular basis mean higher management and transaction costs, which affect returns to investors.

“At APN we turnover less than 10 per cent of the LPT portfolio a year,” he said.

“I accept our strategy could cause some friction between brokers and us because we are not generating lots of business for them, but we do work on the relationships and explain our long-term view to them.”

Doble said the short-term view that pervades in the LPT fund manager industry also applies to new offerings.

He cited a recent example where an unlisted manager offered a proportion of a capital raising to APN at a “good price”, as the valuations of the assets were going to be better than forecast in the prospectus.

“APN had the decision of short-term gain for long-term loss of credibility,” Doble said.

“We passed on the so called ‘opportunity’ as our management credibility would have been impacted in the long term.”

Doble also argues the short-term approach also impacts asset allocation in property funds.

He cited the fact that 57 per cent of Australian LPT assets are in the New South Wales office market.

“Office allocation is massively overweight in the NSW office market, yet Sydney’s average rent growth is 4.9 per cent compared to 5.8 per cent in Melbourne.”

Victoria office allocation in Australian LPTs is 16 per cent while Queensland is 12 per cent and Western Australia 7 per cent.

“The standard deviation of office vacancy in Brisbane is 4.5 per cent compared to 7.5 per cent in Sydney,” Doble said.

“Is it perceived volatility in the Brisbane and Perth markets that keep them out of LPT portfolios?

“It is probably a combination of perceived volatility and LPT managers’ familiarity with their hometown, Sydney.”

Despite mismatches in property allocations, he sees a good future for Australian property, although there will be volatility in growth-orientated LPTs.