LPTs losing their safe haven status

The listed property trusts (LPTs) sector is no longer the ‘safe haven’ asset class it was once considered to be, and advisers need to be aware of the changing risk profile and altered expectations of future returns, according to the latestInTechPerformance Survey.

According to InTech head of investment research Michael Coop, the LPT sector may not be able to sustain the high returns of recent years, which were aided by falling interest rates and the absence of a recession — an environment which is unlikely to continue in the next decade.

Coop also says changes to the composition of LPTs, spurred by factors such as an increased use of borrowings, overseas investment and exposure to property management and development activities means investors are “investing in a different asset class than they were ten years ago”.

As an asset class Coop says the LPTs sector is now much riskier and advisers must be especially vigilant in ensuring investors understand the changing nature of LPTs.

“The bottom line is more risk, and investors seeking a low risk source of income for their retirement should not be heavily reliant on LPTs. For the more adventurous, LPTs will still provide attractive long-term returns, although lower than the past decade, with risks more akin to shares than direct investment in property,” Coop says.

While the sector historically has had low correlation to sharemarkets, LPTs are now borrowing significantly more, with gearing magnifying the rate of return of underlying investments, exposing the sector to the ups and downs of the interest rate cycle.

This is further complicated by many of those underlying investments being sent offshore, in particular to the US, leaving investors exposed to more currency risk.