Fine forecast for property securities

The so-called crisis in the US sub-prime mortgage sector, currently sending shockwaves across the globe, is a storm from which the global property securities market will emerge triumphant within the next two to three years, according to the US-based managing director (securities) of one of the world’s leading property investment management firms.

Todd Canter, of LaSalle Investment Management, told Money Management that the recent worldwide devaluation of REITs (LPTs in Australia) was something of an overreaction to market volatility caused by large-scale debt in the US sub-prime mortgage sector.

In his view, global property security fundamentals are still robust and should drive positive double-digit returns over the next two to three years.

“The turmoil in the credit market is causing risk to be re-priced by lenders and commercial mortgage-backed securities investors and this, in turn, is driving up the borrowing cost for real estate investors.

“We believe the drop in prices . . . is out of proportion to the changes in the credit markets, particularly in the US and Europe where price drops have been most significant.”

Canter said that while he would not be surprised if increased borrowing costs lead to a “modest” increase in cap rates, demand from institutional investors worldwide for property securities is still high and will lead to strong returns going forward.

“Right now we’re witnessing a disconnection between the performance of these stocks and their prospects.

“Rising borrowing costs have made market conditions less favourable for high-leverage, private buyers [who are believed to have fuelled much of the privatisation over the past two years], but we believe low-level investors have filled the void and that the acquisition market for commercial property will remain extremely competitive.”

Canter stressed that the sub-prime mortgage sector is only a small slice of the US economical pie, representing around 8 per cent of the total US home loan pool.

He said the US real estate market is generally healthy, with strong tenant demand and moderate supply expansion across all sectors.

“Once people put things into perspective and anxiety starts to subside, property equities will begin to trade at levels more in line with their strong fundamentals. We’re in a period of recovery at the moment and [LaSalle] believes the sector will soon start to show strong returns.”

Canter said global property equities are currently trading at a 15 per cent discount to their net asset value (NAV), well below the long-term premium on asset value of 8 per cent.

While he does not forecast a return to the very high returns of the past five years (hovering around 25 per cent), he expects property securities to trade on their fundamentals in the long-term and deliver returns “within the high single to low double figure range”.

Head of client services for LaSalle’s Melbourne branch David Quirk said that strategic, long-term investors should recognise the continued value of property securities as part of a diversified portfolio.

He pointed out that global property securities have traditionally been regarded as moderate-risk investments and should be treated as such.

“Most of our investors realise this and we’ve seen many add to, rather than take away from their allocation to property securities.”