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Cyclical slide for LPTs

LISTED Property Trusts, popular with investors over the past year, have lost favour in recent weeks as confidence in the outlook for the domestic economy grows.

Ironically, the LPT sector does well when business sentiment is down, and vice versa.

Uncertainty in the wider market and concerns about the state of the global economy (the US in particular) fuelled a “flight to safety” for most of the month of August. This led to the LPT Price Index significantly outperforming the All Ordinaries over the period from the start of the new financial year to the end of August by 9.3 per cent.

Property Investment Research senior analyst Danny Housepeters foreshadowed in the August issue of the Independent Property Trust Review what a turnaround in confidence would mean for the sector.

“Our main concern for LPT prices going forward centres around a possible increase in the appetite for risk of fund managers if the prospects for the domestic economy continues to improve,” Mr Housepeters said. “This would see a net outflow of funds from the trust sector and a subsequent fall in LPT prices.”

That is exactly what has occurred in recent weeks. LPT prices have fallen sharply from their late-August peak of 1403.4 points, helped along by a 25 basis point drop in the cash rate by the Reserve Bank of Australia last week.

The LPT Index lost 0.97 per cent between July 31 and September 7 and is down 3.8 per cent from its August 28 high.

Mr Housepeters said Australia should continue to recover over the next six to 12 months, although a lot rested on the US economy.

“This bodes well for the long-term outlook for LPTs, but short-term price instability may persist whilst fund mangers continue to shuffle their monies between cyclicals and defensives as the view of the global economy remains unclear,” he said.

There should be an increase in merger and acquisition activities during next 12 months, according to PIR, as companies with less than $200 million of funds under management find it increasingly difficult to survive.

“It has become clear that while there are opportunities for new entrant into the property funds management industry, in particular syndication, the time frame for the establishment of a sustainable operation is probably in the range of two to three years,” PIR director Anton Lawrence said.

“Below the level of $200 million (funds under management), given the level of on-going management fees, fund mangers will need to rely on the up-front fees derived from the establishment of new syndicates to fund their on-going operations.”

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