Listed property trusts go global

Overseas property will dominate the listed property trust (LPT) sector in 2006, according to researcher Property Investment Research (PIR).

PIR’s head of research John Welch says the percentage of overseas property in LPTs grew to 37 per cent in 2005.

“We expect that to climb to more than 50 per cent by the end of 2008 as a result of the insatiable appetite for LPT securities.”

Currently, the US dominates overseas LPTs, accounting for 86 per cent of the total assets held in overseas trusts.

PIR expects managers in 2006 to cast their nets wider and to look at Europe and Asia.

Welch says Europe, with a relative large yield spread, is likely to become more popular as a source of properties.

“However, the problem will be in sourcing these properties,” he says.

“Strong relationships are often required to source properties in the ‘Old World’.”

Welch believes this difficulty might force managers to look to Eastern Europe, where market reforms are in place and have shown a record of stability for some time.

Asia will be the other source of property assets for LPTs in the next 12 months as Singapore and Hong Kong have fledgling Real Estate Investment Trusts (REIT) markets developing.

“The Hong Kong REIT market will probably become the main listing board for REITs holding properties in mainland China,” Welch says.

But PIR predicts global diversity will not change returns for the LPT sector.

“Returns for LPTs will be much like 2005 — boring but safe,” Welch says.

“The November price rally has reduced our 12-month forecast total return for the sector to between 1.9 and 4.9 per cent, based on one small rate rise in 2006.”

Volatility in the LPT sector should decrease, PIR predicts, due to the sedate returns.

However, it will be only slightly lower than that achieved in 2005 and will remain above historic volatility levels.

“This is because stapled LPTs, which comprise the majority of the index, are treated more like shares than a traditional LPT, due to the business part of their income,” Welch says.

“As retail properties comprise more than half the properties in the index, any change in consumer spending or sentiment can affect unit prices and therefore volatility is likely to continue.”