LPTs act like shares

The recent market volatility has confirmed listed property trusts (LPTs) act more likes stocks than property, a leading property manager claims.

Australian Unity Investments head of property Martin Hession said the ASX 200 Property Trust Index had fallen 25.1 per cent during the last three months ending January 29.

In the same period the ASX 200 share index fell 15.4 per cent.

“During last year the direct property market has been pretty boring with returns in double digits,” he said.

“So if ever there was proof needed LPTs are not property, the ASX proved that.”

Direct property returns to September last year (the latest available figures) show Perth CBD offices returning 38.46 per cent, Brisbane industrial 16.28 per cent and Australian major retail centres 16.28 per cent.

Hession said the reason why LPTs have performed so badly is many of the investments are in overseas property and speculative developments.

The high levels of gearing that haven’t always been transparent have caused investors to become nervous.

“I think a complex corporate structure, like Centro, has meant investors didn’t know the true cost of gearing,” he said.

“The problems at Centro are not with the properties, it was the debt management.”

Hession hopes Centro does succeed in its restructuring otherwise all property trusts could suffer.

“I am not saying don’t invest in LPTs, as some are defensive investments in volatile times,” he said.

The alternative to LPT investing is using unlisted property trusts where the unit price is based on net tangible assets (NTA) not market sentiment.

With the strong performance of direct property, Hession predicts investors will switch to unlisted trusts to counter the volatility of the LPT sector.

“When a financial planner puts 15 per cent of the asset allocation into LPTs, then you are opting for the same volatility as Australian equities.

“It is critical for investors to understand this,” he said.

“To avoid the volatility, financial planners should be looking at using unlisted trusts, which is a more ‘pure’ property investment.”

The outlook for direct property remains good, Hession said, with the office sector in boomtowns such as Perth delivering exceptional results. Perth has a 0.3 per cent office vacancy rate, which has fuelled the 62.1 per cent rental growth in 2007.

“Perth is a supply and demand situation and there are a number of new office developments under way, which means the vacancy rate will go through a ‘boom to bust’ cycle,” he said.

Similarly, the demand for industrial space in Perth is strong; however, that is dependant on the mining boom.

It is a similar story with retail space in Australia, which is still strong due to discretionary spending levels. Hession warned however that if discretionary spending falls, due to rising interest rates and economic pressures, then retail would be hit, lowering returns for the sector.

Demand for office space in eastern seaboard centres continues to be strong, but any downturn in the financial services sector could hit returns, he warned.