In property we trust
Listed property trusts have copped a fair bit of bad press in recent months following a string of corporate collapses that left investors millions of dollars out of pocket. But are these investment vehicles as risky as they’ve been made out to be? Researcher Richard Cruickshank outlines the importance of due dilligence
PROPERTY trusts have been making the news in recent times for all the wrong reasons. Problems with high-profile groups such as Centro Properties, which have seen investors burned, have damaged confidence in the vehicles. Further collapses such as Westpoint, Fincorp and Bridgecorp have made matters worse.
Yet, for all the turmoil in the listed and unlisted property trusts sector - largely triggered by the expiry of debt obligations and the US subprime lending crisis - investors should not avoid companies that invest in and manage property assets. These assets can be anything from large CBD office buildings, shopping centres and industrial sites, right down to residential estates. There are many successful companies operating in this area, including the likes of Westfield Group, Macquarie, Stockland and ING. Having said that, there will be times when they are impacted by sharemarket sentiment.
So let’s set the scene in more detail. Australia is actually the most securitised market in the world when it comes to investment in property assets, with approximately 70 per cent of investment-grade commercial real estate assets being owned by listed and unlisted property trusts. With assets of about $360bn at the close of the 2007 financial year, with some 1.3 million investors, the Australian property trusts industry has experienced a rapid rise. In fact, it has experienced roughly 20 per cent year-on-year growth since PIR began formal data collection on the sector in 2000. This has been driven by the inflows from compulsory superannuation contributions and a strong growth environment.
If the current sector problems fail to derail growth in 2008, we expect the industry will be worth more than $450bn by 2009, with increasing attention being directed offshore to the US, Asia and Europe. Retail investors seeking exposure to property through an investment vehicle are confronted foremost with the choice of either a listed or unlisted property trust investment. Each has distinct advantages and disadvantages, yet adhere to the same core principles of a pooled property investment. Both entitle investors to a unitised investment which offers the potential for capital growth and income.
Investing in a property trust is a way of reducing the risks associated with property investment, as long as the vehicle selected is appropriate to the investor’s risk and return tolerances. For as little as $10,000 (a frequent minimum contribution), an investor can gain exposure to a diversified portfolio of assets that would be unattainable through direct property ownership. Within a listed investment, securities are openly tradable on an exchange such as the ASX, and are valued through market dynamics and sentiment.
While managers of unlisted investments provide varying degrees of liquidity depending on the characteristics of the trust, the availability and proportion is frequently tightly controlled and is a fraction of their listed counterparts. For this reason, unlisted investments should be largely thought of as illiquid. Unlike unlisted vehicles, where unit value is generally calculated by the manager on an approved formula, listed property securities are subject to price volatility due to additional real time factors. These include interest rate fluctuations, rolling debt, market sentiment, takeovers, management changes and mergers.
Security holders of listed trusts generally receive benefits from distributions, tax advantages and capital gains. While listed property has arguably excelled over the past decade relative to the market, volatility has likewise been above that of the market. Displacing the notion that property is somewhat of a sedate investment, volatility of the S&P/ASX 200 Property Trusts Accumulation index has recently exceeded that of the All Ordinaries Accumulation index.
Undoubtedly investors can prosper from upswings just as they can suffer by either buying at too high a price or selling too low. The influence of broader market sentiment and the manner in which listed property securities are being traded, is becoming increasingly aligned with broader market movements as opposed to those trends present within the underlying property assets held. In the current credit induced climate of uncertainty, investment risk is increasingly being scrutinised and evaluated. Property has traditionally been thought of as a lower-risk investment and largely remains so, relative to a number of alternatives, when invested in diligently. However, the prolonged period of sustained growth within which property and most other asset classes have prospered has inflated investor appetites for risks that are commonly ill perceived and frequently blindly fumbled past. Investing only in what is fully understood (on the basis that the risks are consistent with the investor’s tolerance) has rarely proved detrimental.
Within the current market’s volatility, opportunities will indeed present themselves. But it really is a matter of doing your homework, asking the right questions, understanding your investment and drawing on the skill-sets of a qualified financial adviser to guide you in the right direction.
Richard Cruickshank is managing director of Property Investment Research (PIR).
