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Property trusts on the rebound

LISTED property trusts, underperformers when compared with the general equity market during January, have bounced back in February.

According to the Independent Property Trust Review, the Listed Property Trust Index closed down 3.4 per cent over January 2000, while the All Ordinaries and All Industrials fell 1.8 per cent and 0.5 per cent respectively.

In February the LPT Index outperformed the All Ordinaries Index more than fourfold. The LPTs gained 6.6 per cent in February, while the All Ordinaries Index increased just 1.5 per cent.

The turn around in the fortunes of LPTs comes from the expectation that interest rates may not increase as much as industry analysts first thought.

Rationalisation within the industry is becoming increasingly likely according to a report into the property market by Westpac Bank.

“Adding to the changing dynamics (of LPTs) is the looming rationalisation of the industry, with players striving to grow their market capitalisation to beyond $1 billion in order to compete,” Westpac’s Outlook for Australian Property Markets, 2000-03 says.

“It is now clear that managers need to focus not just on property management, but more particularly on capital management, to find ways to lower the cost of capital so as to enhance returns,” the report says.

The commercial sector was the worst performing LPT during January, falling 5.4 per cent, according to the February monthly study by Property Investment Research.

The commercial sector decline was pushed by a 10 per cent decline in the Arm-strong Jones Office Group and a 7.8 per cent decline for Australian Growth Properties.

The industrial sector was the next poorest performer closing down 4.8 per cent, with a particular drop for Flinders Industrial of 11.6 per cent and a 7 per cent drop in the Armstrong Jones Industrial Trust, the study says.

The best performing sector was the hotel sector finishing up 4.2 per cent with a significant re-rating in the Grand Hotel Group by 12.9 per cent.

According to the report’s author Sally Humphris, property trusts are trading at a very low 6.75 per cent premium to their underlying net tangible assets.

“The LPTs are now trading at the lowest price premium to net tangible assets since August 1997,” the study says.

“It is difficult to select the exact timing of the trough in the sector.

“However, on fundamental valuations, the sector looks attractive and the bottom is likely to occur ahead of peak interest rates in this cycle,” it says.

The reports suggests significant upside within the retail sector.

The best buy within the sector is AMP Shopping Centre, which is currently trading at a 21 per cent discount to fair value, the study says.

In the industrial sector the best buy is the Industrial Investment Trust currently trading at a 16 per cent discount to that which Property Investment Research holds to be fair value.

Opportunities still exist in the commercial sector as well. For example, the study says that Westpac Property is currently trading about 32 per cent off its true value.

Advance Property and the BT Property Trust also represent good value in the diversified property sector, the study suggests.

Colliers Jardine research manager David Cresp said, over the next twelve months, the focus would probably return to the office and industrial sectors, after strong interest in the retail sector.

Currently, retail property makes up around 77 per cent of all trust holdings in WA.

Mr Cresp said, while increasing interest rates would make it harder for LPTs to purchase property over the next few years, it would possibly increase the value of property held in WA.

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