This article is from the Australian Property Journal archive
PART TWO: SHORT term risk remains in the A-REIT sector and a strong recovery is highly unlikely, but simple vanilla property trusts will be the new flavour in the year ahead.
But the Adviser Edge National Property Sector Update July 2008 warns against investors looking to capitalise on the “cheap” buying opportunities in the market.
Yesterday, Adviser Edge’s head of property Louis Christopher said this short-term risk is noted with particular regard to the coming June 30 reporting period where it is likely many A-REITs will fall short of investor and analyst expectations on current earnings and future outlook.
He added that with current discounts of the A-REIT market as a whole being reflective of reasonable softening expectations in the underlying direct property market, speculators and those looking to recoup recent loses are likely to be disappointed.
Meanwhile, Christopher said suggestions of value were made during early 2008, with fund managers keen to capitalise on what they perceived to be “cheap” buying opportunities in the market.
“The market however had very different plans, with stock prices continuing to plummet through to June 2008, and still as yet, showing no sign of recovery,” he continued.
Over a 10-year period, property stocks have historically made for a relatively strong investment, when compared to the broader ASX 300 index.
Re-based at June 1998, the ASX 300 A-REIT Accumulation Index is seen to have peaked in October 2007, at a then similar level to the broader ASX 300 Accumulation Index. However, since this time both indices have fallen dramatically, with theoretical $10,000 investments dropping from approximately $38,000, when averaged between the two indices at October 2007, to just $22,800 and $29,700 for the A-REIT and broader indices respectively.
Christopher said the weakening of listed property as a diversification tool has lead to divestment by many fund managers of balanced trusts and superannuation pools.
He said further driving devaluation of the listed property market as a whole has been listed REIT managers using financial engineering to artificially inflate distributions.
The report noted that rampant accounting earnings growth through 2006 and 2007, while the direct property market was enjoying strong buoyancy, saw many managers propping up cash distributions paid to shareholders.
“This was often done using the proceeds of re-geared portfolios or the over issuance of new equity. While little was said about this practice throughout the boom, in recent months ongoing index deterioration has lead to high profile fund managers publicly warning REITs guilty of this practice to cut their distributions to realised income alone.
“Having fallen to discount price levels indicative of a 100 to 200 basis point softening in capitalisation rates, after adjusting for the effect of gearing, it now seems as though a certain balance has been struck between the ASX 300 A-REIT index and expected weakening of the direct property market going forward. While this is not to rule out continued short-term volatility it is suggestive of longer term stability and minimisation of ongoing downside risk,”
Christopher said whereas it was once the case that investment into property related stocks allowed fund managers to achieve greater diversification in their overall asset portfolio, the evidence now suggests that such diversification benefits are no longer being recognised.
“Poor returns in relative and absolute terms, as well as high instability, and weakened attractiveness for diversification purposes continue to make the case for recovery and investment approval quite difficult within the industry,” he added.
But, there is light at the end of the tunnel, Christopher said there appears to be a developing case for those seeking long-term positions, given a stabilisation of current discounts, as well as potential consolidation and strengthening of the market structure as whole.
Similar to previous recommendations, the Adviser Edge report said those REITs with conservative gearing, quality earnings and vanilla trust structures are expected to outperform.
Overall, Adviser Edge has a placed neutral rating on the listed property market as a whole over the longer-term.
“While the view for the listed property market as a whole remains neutral, it is believed over the longer term that confidence will return, and moderated growth will again follow.
“The recommendation of conservatively geared, simplified trust structure stocks, paying out only quality realised earnings remains firm going forward,” Christopher concluded.
Australian Property Journal
