Will LPTs lose their sparkle?

When Don Stammer retired from Deutsche Bank Australia in July 2001, he had notched up no less than 20 years as its chief economist and director of investment strategy.

So when Stammer, now a director of two listed property trusts (LPTs) managed by ING, says he has had more investors over the past three months questioning the value of listed property trust investments than probably at any other time in his long career, it is a statement of some magnitude.

The doubts that many investors now have over the value of listed property securities are understandable.

The sector returned 12 per cent in the 12 months to the end of July this year to once again top the investment league tables that it has dominated for the best part of two years.

By comparison, the Australian share market fell by four per cent, while international equity markets continued to languish, dropping almost 27 per cent in what was another very sober year.

The question now being put to Stammer is not only whether the price of LPTs has got too high, but also whether the relative outperformance of LPTs is about to come to an end.

Stammer’s answer is a qualified no. His advice to investors is to in fact increase their exposure to listed property at the expense of fixed interest investments, but says the advice is valid only for three months, after which investors should again review their position.

“LPTs have performed to the point were some people are hesitant. But the three-month outlook for LPTs is a good one,” he says.

The advice is based on some firm fundamentals. The yield from LPTs is hovering around the 7.7 per cent per annum mark, a full two per cent better than the average 10-year bond yield.

While the spread between LPT yields and the 10-year bond rate remains so large, it is not only difficult to overlook listed property, but also to overlook it in favour of fixed interest investments.

Stammer’s advice is also backed up by a range of other analysts, including Danny Housepeter, the senior analyst at specialist property research group Property Investment Research (PIR).

“PIR are looking for a sustained period of more positive economic news on the global front and some solid reporting season results…before more aggressive equity market positions are assumed by investors. This bodes well for the short-term outlook for LPT prices,” he says.

The analysts at Merrill Lynch have gone one step further. In their latest report into the sector they have forecast that, with listed property yields up around the eight per cent mark, the total return from listed property in the next 12 months will be as high as 13.6 per cent. This means that, for Merrill Lynch at least, the sector is more attractively positioned now than it was 12 months ago.

Such optimism is a subtle departure from the general market consensus about LPTs as early as six months ago.

At the beginning of this year, while the listed property sector was still basking in the glow of a triumphant year, most analysts were predicting that although it would produce solid returns in 2002, it could not possibly out perform other asset classes as it did in 2001.

The theory was that with equity markets due to stage a comeback, and interest rates on the way up, listed property would not finish as high in the league tables in 2002.

What they did not predict was that the negative sentiment on the world’s stock markets, compounded throughout this year by the accounting scandals in the US, would run so deep for so long.

“Ongoing concerns surrounding accounting scandals and the sustainability of global economic growth rates have rocked sharemarkets around the world, with lower risk investments such as LPTs retaining their relative appeal,” Housepeter says.

All this is not to say that all corners of the LPTs market have and will continue to perform well.

If the financial year just finished proved anything, it is that even in a market that performed well overall, there was still room for losers.

While industrial, retail and commercial property focused trusts generally finished the year well ahead, returning on average 21, 16.6 and 12.8 per cent respectively, the hotels sector was not so lucky.

The sector, still reeling from the aftermath of September 11, fell more than 12 per cent for the year, largely on the back of the poor performance of one trust, the Grand Hotel Group, which lost 37.3 per cent.

And there is likely to be more of the same in the year ahead. Most analysts agree the hotels sector will continue to struggle over the next 12 months, while retail and industrial property trusts will again prove strong performers.

The office property trust sector is more contentious, with analysts split on whether it is cheap, or not cheap enough given its performance relative to retail and industrial property focused trusts.

The biggest theme for LPTs going forward however will likely be as much the country they invest in as the sector, with a growing proportion of Australia’s LPTs putting their money into offshore properties.

In fact, some 26 per cent of all monies flowing into LPTs that make up the Australian listed property index are now invested overseas.

Expect this to grow, particularly given that LPTs that invest totally in offshore property, like the Westfield America Trust, which returned 26.6 per cent in the past financial year, are among the top performing property trusts listed in Australia.

Also expect to see local fund managers take a greater interest in global LPT stocks as they chase opportunities in countries with less developed property securities markets than Australia’s, which is roundly regarded as the most mature in the world.

Only last week, Sagitta Rothschild Wealth Management announced an alliance with US-based property manager AEW Capital Management.

Sagitta, in conjunction with AEW, will explore the possibility of launching a fund of global listed property trusts. If they succeed, they are unlikely to be alone, with a range of fund managers in Australia currently considering similar products.

The biggest danger for fund managers, according to Winston Sammut, the deputy chief investment officer at Ausbil Dexia, is a dramatic reversal in the world’s equity markets. Such a scenario would see investors pull out of LPTs in droves and their share price tumble.

Even that, however, might not be enough to see LPTs lose their place as the top performing asset class in the country over the next 12 months, particularly with most other asset classes still deeply in the red.

“If LPTs are going to give you an eight per cent income yield over the next year, then they can suffer a three or four per cent performance fall and still be above the rest of the market,” Sammut says.