LPTs return to favour: report

FOLLOWING a economic slowdown in the latter part of the year, listed property trusts should return to favour, according to the latest Independent Property Trust Review by Property Investment Research.

“We expect to see substantially higher LPT prices triggered by the Reserve Bank’s monetary policy strategy, the anticipated inflationary impact of the GST and a likely decline in sharemarket activity,” the monthly review said.

PIR expects interest rates to rise to 6.75 per cent by the end of the year on top of a GST-induced slowdown.

Traditionally, higher interest rates hurt the LPT market.

They increase the cost of debt and, by increasing yields on safe, fixed interest investments, make LPTs relatively less appealing.

“Interest rate movements are thus the most critical component in any assessment of the outlook for the LPT market,” the review said.

According to the review, evidence was already emerging that recent sharemarket volatility had created uncertainty among investors and fund managers.

Since 1 January, the LPT index has risen 2.39 per cent while the All Ordinaries has fallen 2.07 per cent.

“Continued volatility in the Australian sharemarket should see the LPT Index supported within a forty point range (1220-1260) for the next few months whilst others seek the solace of value-based securities,” it said.

An overall slowdown of the economy will bring to a close the current round of interest rate rises, thereby sparking greater interest in the LPTs.

The review says this may push the Index towards its previous September 1999 high of 1325.

LPTs are currently trading at a 1.7 per cent discount to net tangible assets.

While the discount is small, the review indicates that there are some good buys and upside potential in certain trusts.

PIR believes BT Property and Advance Property represent good value, currently trading at almost 19 per cent discount to fair value.

By contrast, AJ Industrial is trading at a 24.8 per cent premium to fair value according to PIR.

“The current round of monetary tightening may drive the LPT Index towards a higher discount to net tangible assets by the end of the year.

“Alternatively, continued volatility in the domestic sharemarket may see funds flow to the safety of LPTs, causing prices to increase to unattractive levels for the value investor,” the review warned.

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