Although a bit windy, Thursday, December 13, 2007, was a day that could be described by the term favoured by radio weather forecasters for its non-specific character: fine. But for Australian real estate investment trust (A-REIT) managers, the day was anything but fine.

Trading in shares of Centro Properties, one of the country's biggest shopping mall owners, was halted on the Australian Securities Exchange (ASX). As it turned out, the company had fallen victim to the United States sub-prime crisis and was unable to refinance a large chunk of its debt.

Centro had used a model of heavy gearing to fund its aggressive acquisition strategy, with the company growing from $10 billion in funds under management (FUM) at the beginning of 2006 to $26.6 billion in early December 2007. But the mortgage crisis spoiled the party and led to the demise of its main source of capital, the US commercial mortgage-backed securities market.

After this shocking revelation, Centro's share price fell 76 per cent, wiping out more than $3.5 billion in market capitalisation in a single day. And that doesn't even take into account its listed trusts.

Since that December day, none of Australia's REITs have been able to produce a positive return.

"This is by far the worst year we've ever seen. It defies imagination," SG Hiscock and Company chief executive Steve Hiscock told delegates at a recent ASX roadshow on A-REITs.

His company's research shows the REIT sector traded at an average 30 per cent premium to net asset value in January 2007. But currently it is trading at an 11 per cent discount. On average, the sector has fallen 62 per cent in value, when excluding the somewhat distorting effect of property behemoth Westfield.

Pricing risk
The high levels of debt that were commonplace in the sector until recently are largely to blame for the fall in investor confidence, Hiscock says.