Bricks and mortar still holds appeal

Listed property trusts (LPTs) are seen as a defensive investment for this year, with returns for the sector of 11 per cent predicted by Melbourne-based Property Investment Research (PIR).

In the latest edition of its annual LPT review, PIR predicts a minimum return of 10.4 per cent for the sector.

“This performance scenario is based on strong returns during the first six months and assumes continued uncertainty regarding economic recovery and slow economic growth,” the review says.

However, PIR predicts the sector’s performance will be more subdued, as investors switch to growth stocks for better returns.

The overall LPT sector is expected to give a capital growth of 3.09 per cent in 2002 and an income yield of 7.66 per cent, PIR predicts.

The top-performing LPT sector for 2002 is expected to be office trusts, with a forecast return of between 7.39 and 14.46 per cent in the next 12 months.

“There is strong potential for this sector to deliver returns in excess of these figures, given the strong sentiment for the sector that currently exists,” PIR says in its review.

“The office sector looks to offer excellent value for investors in the year ahead, with solid returns anticipated and comparatively little earnings volatility.”

PIR is expecting strong capital growth at the quality end of the LPT office market and singles out the AMP, BT, Deutsche and Lend Lease US office trusts as top performers in the sector.

The retail sector’s predicted return of almost 10 per cent has been influenced by the Westfield Trust’s performance, PIR admits. The Westfield trust has a return of 8.78 per cent and its large market capitalisation has a strong influence on this sector of the LPT market.

Recent events, both locally and internationally, will see investors move into defensive stocks and this could boost the retail LPT sector, PIR predicts.

It is tipping Westfield and Gandel retail trusts, as well as the Bunnings Warehouse trust, as strong performers in 2002.

However, it is warning that the Prime Retail Group trust, despite strong return forecasts, has a number of potential risks that PIR believes will impact on its performance in 2002.

The industrial LPT sector is expected to give returns of 13.54 per cent this year, PIR predicts.

The slowing of demand for industrial space in 2002 will have little impact on the returns of trusts in this sector and capital growth is predicted to remain strong during the next 12 months.

PIR is tipping AMP, Deutsche and the Macquarie Goodman industrial trusts as top performers in 2002.

The hotel and leisure LPT sector is still under-performing and PIR sees little change in 2002. It is predicting a return of 11.55 per cent for the sector and a capital growth of 0.48 per cent.

“The uncertainty in the marketplace, as a result of international and domestic events, will have a detrimental impact on the performance of trusts in this sector,” the review says.

“PIR believes this will make it extremely difficult for vehicles in this sector to achieve forecast total returns suggested by the fundamentals.”

It is tipping the Grand Hotel Group, Macquarie Leisure Trust and Thakral Holdings Group trusts as possibly achieving returns above 10 per cent.

The diversified LPT sector is predicted to give a return of about 10.35 per cent with low volatility. PIR predicts capital growth of between 1.89 and 3.15 per cent for the sector. It is forecasting the Mirvac, General and Stockland trusts as top performers.

PIR sees more investors supporting LPTs in 2002 and this will drive down the cost of capital for trusts when acquiring further property assets.

“The last 12 months has seen about $2 billion raised out of the market and we would expect this to be exceeded in the coming year,” the review says.

“With volatility in the broader equity markets expected to continue, the defensive attributes of the LPT sector should come into their own.”

PIR expects lower interest rates and slowing economic growth will enhance the appeal of LPTs. Merger activity, while slowing in 2001, will also assist earning growth for LPTs this year.

PIR is warning of some risks for LPTs and these focus on tenant demand levels due to the slowing economic growth in some sectors.

“A slowing economy ultimately indicates lower levels of demand for office and industrial space, and less consumer confidence leads to lower growth on retail sales,” the review says.

“New construction levels are low across most property markets, vacancy levels are currently low and stable and sub-leasing markets are currently slow.”

PIR believes that these risks will not alter the relatively good news story that exists for the LPT market in 2002.