Property
Substantial capital raisings for LPTs
December was a very volatile quarter, with the S&P/ASX 300 Property Trusts Accumulation Index moving more than 5% on over 25% of trading days. The index finished the quarter down 33% – one of the worst returns on record.
The sharp fall was the result of significant capital raisings, the calamity enveloping global listed markets, and the rapid fall of the Australian dollar.
More than 45% of the sector (by market cap) announced a need to raise capital over the quarter, and $4.7bn was raised, equal to 9% of the sector’s total value as at the end of December. Initially, this caused sharp falls in the value of many trusts but those that raised equity are now in a much stronger financial position and most rallied afterwards. Some of the capital raisings were even considered opportunistic as they will allow trusts to buy assets being sold by distressed sellers or invest in growth areas.
Prolonged turbulence in global markets also proved difficult for trusts. Governments stepped up their intervention in the banking sector and major central banks coordinated a global interest rate cut in an effort to stop the turmoil. At the heart of the commotion is banks’ reluctance to lend money and the freezing of credit markets. Debt financing plays an integral role in the structure of many trusts, so this continued to put downward pressure on the sector. The sharp fall in the Australian dollar also hampered trusts, particularly those with large amounts of loans denominated in foreign currency.
In the direct market, which has not experienced the same falls as the listed market, transaction volumes remain low. This is due to sellers wanting higher prices than buyers are prepared to pay, as well as the unwillingness of banks to lend money. If credit markets improve we may see an increase in transaction volumes, but prices will need to fall first. However, we are seeing some very opportunistic buying of distressed assets, particularly from private and foreign investors.
The traditional ‘safe haven’ status of Australian listed property trusts may have been diminished, but there are still some positives. Although some of the sharp falls in the listed market are due to investors pricing in future weakness in direct markets, it is unlikely that direct markets will fall to such a level to justify this weakness in listed markets.
Forced sales in the direct property market may put pressure on some property valuations, enabling shrewd managers to set portfolios at bargain basement prices. Perceptive managers will also be able to reduce the risk to their rental income through the use of long-dated leases.
The current financial crisis may result in further cuts to official interest rates, which is a good thing for the property sector. These large falls may present an attractive entry point for long-term investors and some excellent value based investment opportunities for the astute manager.
