Investors turn away from listed property

Australian investors are pulling back from the property sector on the premise that the bull market of the past few years has ended, according to industry experts.In their view, the sub-prime mortgage meltdown and subsequent global credit crunch have exposed and exacerbated existing fractures in property’s apparently golden façade.

Select Asset Management chief investment officer Dominic McCormick said these events have proven property was over-valued and should no longer be treated as a defensive asset.

“Clearly the bull market in listed property has come to an end. It happened overseas first, but [the Centro debacle, in which the property giant admitted it is close to collapse after failing to refinance billions of dollars in debt on the stricken US credit markets] proved it’s reached Australian shores.

Even before that, though, listed property trusts had started to underperform the market significantly.”Julian Battistella, principal consultant of Melbourne-based Battistella Financial Planning and Money Management’s Financial Planner of the Year, agreed, saying investors had begun to recognise the heightened risk associated with investing in listed property trusts.

“These trusts are no longer solely about passive investment properties, they’re about developing properties as well. And

with increased gearing levels, comes increased risk.”Battistella said his clients had reduced their exposure to the sector as a result, adding that increased costs of property investment combined with yield compression meant they were no

longer good value.

Like McCormick and Battistella, Neil Kendall, principal of Brisbane-based financial planning

firm Tupicoffs, agreed that investors are now well-aware that property is no longer the “safe haven” it once was and that fundamental changes in listed property trusts, including greater gearing levels, mean that they are far riskier. In his view, investors will turn away from listed and unlisted property trusts in favour of direct property. “When you buy a property directly, you know who the owner is, you know the level of gearing, you know who the tenants are, you have a greater understanding.

Whereas, when you buy into a listed or unlisted vehicle, you’re relying on someone else to impart that information for you.” McCormick said he expects fund managers that promise retail investors daily or weekly liquidity on properties with underlying illiquid assets are likely to run into trouble. “This mismatch will become clearer to investors, particularly in difficult markets where gearing is involved. And we’re entering a difficult market now.” “I think there’ll be issues where investors who thought they were in for the long-haul decide they want to get out [of their property investments]. And if they all get out at the same time and the underlying assets have to be sold, returns are likely to reduce dramatically and fund managers may even be forced to suspend redemptions.” McCormick said this highlighted the importance of managing investors’ expectations.

McCormick, Battistella and Kendall agreed that the property sector still presented valuable opportunities, but market volatility and credit concerns, which do not look like they are going away any time soon, mean investors need to be cautious. “It will be an interesting year because tougher market conditions are exposing flawed investments,” McCormick said.