property trusts tipped to bounce off lows

ITH the unit prices of listed property trusts now bumping along at historic lows, is this the time to invest selectively?

While many people remain sceptical, others point to the recovery in the past two weeks as signalling a bounce back off the bottom.

The 33 biggest trusts on the S&P/ASX 300 Property Trust Index have gained 16 per cent since July 15 when the index touched an unprecedented low.

And although the US-REIT sector has since suffered its second biggest fall this year, the latest fall in A-REITs unit prices has been more moderate.

Notwithstanding ongoing volatilities, some leading fund managers believe a window to pick up good investments at rock-bottom prices is starting to open.

Jeff Rogers, chief investment officer with financial planning firm IPAC, observes that while it is impossible to pick the bottom of the market, the firm has been a buyer. IPAC, which manages $500 million on behalf of clients, has been using its cashflow to top up its A-REITs weighting, which has fallen with the decline in unit prices.

"We are net buyer in the market," Rogers says. "Our view is we cannot be so precise as to when the market will bottom out.

"If investors bought into the sector last week, they would have gained 15 per cent this week."

But fund managers say property is a long-term investment and people should not be comparing performance month to month. "If someone buys a portfolio of quality trusts today, the investor can expect low double digit returns of the next five year," Rogers says.

"It might not feel like you are winning in the first six months, but remember the sector is restructuring. In five years time, you can look back with strong annual returns."

He believes that half of the 33 trusts on the S&P/ASX 300 Property Index might disappear in the wash-up and that mergers could unlock the value of some trusts.

UBS head of Asian real estate Mark Ebbinghaus says there will be a window of opportunity in the next three to six months to buy well in the listed sector.

Investors should be looking for trusts that have enough depth and liquidity, he says.

He says international investors looking at Australia had said they would like to see A-REITs get their capital management under control.

He says there could be a "bit more pain to come" and prices would continue to be under pressure. It is likely that some trusts will be forced to sell assets or place rights issues that would be dilutive to existing unitholders.

It also will be likely that some trusts could be forced to de-staple, hiving off their funds management and development business, he says.

Private equity groups will be interested in buying some of these development businesses, Ebbinghaus says.

Ken Marshman, managing director of JANA, which advises super funds on their $100 billion under management, says: "Listed property is starting to look attractive and we may possibly re-enter the sector. We would like to have a better understanding of their rental incomes and structure before we go back into the sector."

JANA stopped investing in the sector in preference to direct property when it started to perform like banks, because of their high level of gearing. But in recent months, it has started to reassess its position on listed property, he says.

Paterson Securities property analyst Jonathan Kriska says the sector has lost 50 per cent of its value but has bounced back 16 per cent since the July low.

The recovery is stronger than the general equities market, which regained just 2.6 per cent.

Kriska believes the market has reached the bottom. In a recent note to investors, he wrote: "The pricing on A-REITs now reflects Armageddon. Even if you make assumptions about falls in property values and the resulting net tangible asset (NTA) based on the trusts gearing, many trusts still look oversold."

His analysis showed that most trusts look fundamentally undervalued, but he added: "However, the bigger issue is that most have new debt levels that would send them into breaching their debt covenants."

Kriska says even Westfield, which had long been seen as a safe haven due to its financial strength, in recent weeks had been strongly sold down.

"To us this indicates the final nail in the coffin for a sector which is now off 50 per cent from its highs," he says.

Perhaps a telling point is the resilience in the share price of Macquarie DDR Trust, with more than $2 billion worth of assets in the US.

On Wednesday, the trust confirmed market speculation that its single largest tenants, discounter Mervyns, had filed for Chapter 11 to give it time to work out it business affairs.

Although Macquarie DDR Trust generates 10.6 per cent of its incomes from Mervyns, investors did not sell off the stock.

Instead, it rallied, gaining half a cent after the announcement.

Even analysts are generally sanguine, noting that the news was not as bad as feared.

They say at the current prices, all foreseeable bad news have been factored in.

But some managers remain to be convinced. Leigh Gavin, head of property with Frontier Investment Consulting, says: "We moved out of the listed sector when trusts stopped being landlords and became fund managers and developers."

Today, Frontier's clients have up to $10 billion invested in direct property. "It is unlikely that we will go back into the listed sector anytime soon," he says.

http://www.theaustralian.news.com.au/story/0,25197,24113799-25658,00.html