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Do Property Troubles Lay Ahead

Listed Property Trusts (LPT’s) have been an excellent entry to the desirable, larger blue chip commercial property assets that more than stretch the budget of the humble many.

During the last five or six days I have looked closely at the Australian markets, LPT’s in particular and note one or two signs of grief are appearing. The share price of several has really taken a strong drawdown in the calendar year to date.

Those that have offshore assets are leading the rout. Centro Properties Group is down 40%, Reckson New York 38%, Centro Retail Group 29% and Tishman Speyer down 28%. Many of these names will be unfamiliar to NZer’s but the story is the same. Assets purchased at the top of the market with high levels of debt contributing short term to higher and higher shares prices – not so today the rising tide of interest rates has stemmed the rewards so hastily, so easily harvested.

Sure, of the developed markets the Australian LPT market has held up well but those rising interest rates have signalled something has to give – the share price or more correctly the price of risk.

I noted that some Australian LPT’s are having a hard time but it’s just not them alone. The UK, some are trading at 30-40 % below net asset value (NAV), France 25%, the Dutch at around 30% and of course in the USA - anybodies guess really but that 30-40% plus figure is entirely probable.

How have these startling numbers come about you might ask, hasn’t the world been ticking along nicely and hasn’t property really been a golden goose? The three culprits; rising interest rates, USA lead credit melt down (subprime etc) and the financial engineering of LPT’s to keep distribution rates high. The financial engineering involves ‘stapling’ the real property asset income (rent) with the earnings of the property management company and or the property development activity profit from the company. The resultant security is then geared to around 65% with rolling debt facilities: Hey presto - increased dividends, increased earnings, increased share price. Until interest rates catch up or the debt is called - then the tears flow.

I can hear you saying, can this happen in NZ? The answer is yes. Even now we see at least two of the LPT’s share price well off their recent high. The other local LPT names are yet to see any real price detraction but stubbornly higher interest rates and higher gearing, as one of those tried to vote by resolution at its recent AGM, are a recipe for the same outcome. 65% debt to equity is fine short term but 35% long term is much more comfortable. No debt at all, while very boring is really the go - but you will not find that in any LPT!


Original Article published April 2007


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