Is property cooling off?
There is a positive outlook for commercial property in 2004, but a few concerns might rock the boat, says APN Funds Management executive director Howard Brenchley.
Fears include the strength of discretionary spending during the year, which, if it falls, will hurt retail property and have a knock-on effect for industrial vacancies.
Retail property has been the darling of the syndicate market, which continues to grow. New syndicates have been issued already with the new year barely a few weeks old.
Brenchley says with the cost of debt at about 6 per cent, yields for syndicates have dropped from 9 per cent to 8 per cent.
“As the cost of debt increases, it makes it harder to deliver high yields at a reasonable level of risk,” he says.
The concern for the syndicate sector is rising interest rates, which will push yields and property values down.
This could be a problem for syndicates that are coming to the end of their lives and want to sell the property assets.
However, most syndicates have the proviso of extending the life of the investment vehicle, which might alleviate the problem of selling in a depressed market.
Meanwhile, listed property trusts (LPTs) will enjoy a reasonable year, Brenchley believes.
“The sector started the year at 1,000 points (the LPT index) and enjoyed about 8 per cent yield,” he says.
“There was roughly 3 per cent earnings growth, and a return of 11 per cent for the sector is not unreasonable.”
Brenchley believes the LPT sector is not over-valued and there should be some growth during the next 12 months.
Last year saw considerable rationalisation of the sector and he believes that has now calmed down.
“We might see some new IPO offerings during the year,” Brenchley says.
“But people will have to watch the strength of the Australian dollar if there are any new international funds being offered.”
The unlisted property trust market is seeing a move towards open-ended trusts, a move that is expected to continue during 2004.
“What this has done is grow the funds in the trusts, which in turn has enabled them to diversify the investments and the returns,” he says.
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