Super funds eye unlisted market as LPTs disappoint

News analysis

By Charlie Corbett
Thu 19 Jul 2007

Every dog has its day. And it seems that Australian investors feel the listed property trust sector is one particular dog that has seen better days.

Every dog has its day. And it seems that Australian investors feel the listed property trust (LPT) sector is one particular dog that has seen better days.

And it's not surprising. Returns from LPTs since January have been decidedly limp.

Those who invested across the S&P/ASX 300 Property Trusts Sector could have expected an average return of -2.5 per cent on their investments up to June 30 this year.

If they were invested in the S&P/ASX 300, however, they would have seen their capital increase by almost 11 per cent.  In the last month alone, property sector returns were -6.2 per cent.

It's all a far cry from 2006 when the sector as a whole returned a spectacular 34 per cent to investors, well ahead of Australian equities, which returned about 25 per cent.

Many believe the flabby nature of LPT returns this year is unsurprising. "They are trading at prices way above net asset backing," Australian Unity's head of property Martin Hession told journalists in Sydney this week. " . . .LPTs have become just another industrial company with real estate as their commodity."

He said that LPTs tended to have high debt exposure and unnecessary currency risk through too many assets located overseas.

The solution for investors looking to get property exposure, according to Hession, is to invest in the unlisted market.

He forecasts the unlisted sector will return 12 per cent to investors this year, while the listed property trust sector will return just 9 per cent.

Investments in unlisted property trusts have taken off lately and they are investing in property like never before.

For the year 2006/2007 unlisted property trusts acquired $3.4 billion worth of Australian property, just below the $3.8 billion forked out by LPTs.

Property trusts are the only way to get pure property exposure, according to Hession, and more importantly it avoids equity market volatility and risk.   

Pentacle Property Funds Management chairman Bob Officer agrees. He said that the largest 100 superannuation funds in the country have a 6.25 per cent weighting to unlisted property and estimated this will increase to 8 per cent to 9 per cent within the next 12 months.

"The listed property sector has put itself in the volatility firing line by stapling core property assets to securities with a range of other property business activities, particularly funds management, and increasing gearing and currency exposure. While these actions have clearly helped the listed sector to outperform the unlisted sector, the risk profile attached to listed property has increased markedly."

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