LPT concerns remain: Bell Potter

Listed property trusts (LPTs) are the biggest area of concern on the Australian Securities Exchange (ASX), Bell Potter director of research Peter Quinton warns.

“LPTs are a lot more complex now compared to what they used to be,” Quinton said.

“As a result they are running a lot more risk for not much extra return.”

Quinton said that while the sector still delivers about 87 per cent of its earnings from passive rental incomes, that’s not considered a defensive position in the current volatile investment market.

He said 13 per cent of trust earnings were sourced from developments that will be more difficult to undertake in the present economic climate. The debt levels of LPTs had also risen to 34 per cent this year, compared to 25 per cent in the late 90s.

Quinton said these higher debt levels created potential refinancing risks.

“There are going to be more Centros in this sector,” he warned.

“It is a sector to totally avoid until further notice.”

Bell Potter hasn’t recommended any property trusts since May 2006 and Quinton said the broker was still waiting for a re-entry point.

While LPTs are very much out of favour, resources are tipped to remain the stellar performer of the ASX in the next financial year.

Resource stocks earnings per share (EPS) growth are tipped at 10.8 per cent this financial year by Bell Potter.

This is expected to be closer to 50 per cent in the 2009 financial year due to strong global demand for resources.

“Australian resources stocks are undervalued and we are tipping very strong EPS growth next year,” Quinton said.

“The strong global demand for commodities during the next decade, principally driven by China and then India, will continue to deliver robust returns during the longer term.”