Debt continues to drive REIT unit prices

The properties in most Australian Real Estate Investment Trusts (AREITs) are still maintaining their value, but debt is driving unit prices down, a fund manager has warned.

Real Estate Capital Partners chief executive officer Andrew Saunders said there were good AREITs that were discounted [to their] net tangible assets because of their debt structure.

“We have trusts with good grade properties that are holding their values but are being discounted,” he said.

“But the trusts with poor assets, and complex debt structures, will dive further in value.”

Saunders said the property markets needed to go back to the 80s, when there was, in effect, an English class system in valuations.

“Then we had the aristocracy of property, which was buildings such as 101 Collins St in Melbourne and Chiefly Square in Sydney,” he said.

“But then we saw an almost communist system where all property yields became the same.

“We now need to go back to the aristocracy of property achieving the best yields while poor quality buildings are priced accordingly.”

Saunders said there would be a flight back to quality properties in the future as trusts do not want to be burnt owning poor property.

Also, AREITs will have to become simpler if they are to attract investors back to the sector.

“We will be seeing two types of trust in the future,” he said.

“One will be a simple income fund while the other will be where people are looking for capital gain growth but with their initial investment protected.”

Saunders said the key element of both types of fund would be simplicity as that is what investors will want in the future, having been burnt with managers such as Centro.

“Valuations on prime assets will continue to rise,” he said.

“When you have buildings 80 per cent let with AAA tenants on 10-year leases, the value will rise.”

The rising values of good quality property will mean AREITs will enjoy a rise in returns during the next few months and then plateau for the next four years, Saunders said.

“I think we will still have volatility in the AREIT sector due to the capital structures of some trusts," he said.

“But we have seen very few trusts go into receivership as the banks are treating the strong cash flows in them as interest payments.”

Saunders said the banks will decide the future of a number of trusts, but strong property values will hopefully stop them putting trusts into receivership.