Property stocks may outperform in a volatile market* Sector...

Property stocks may outperform in a volatile market

* Sector trades at PE of 10, below mining and banking

* Industrial property plays also attractive

By Eriko Amaha

SYDNEY, May 20 (Reuters) - Australian property shares may outperform other sectors with their reliable returns from rental income, fund manager BT Investment Management said.

Peter Davidson, head of property securities for Australia's BT Investment, said 70 percent of the forecast earnings growth for domestic property trusts were already contracted and locked in through tenant leases, making them defensive plays.

"They have been recapitalised and transparent. They had a problem but they are defensive again," Davidson told Reuters in an interview. "Defensive shares outperform in a soft economy."

Their outlook compares with non-property firms which may fall short of expectations if China's economic slowdown and the sovereign debt crisis in Europe persist, Davidson said.
The global credit crisis hit Australian property trusts hard at a time when they were saddled with hefty borrowings and falling prices forced them to write down assets.

But after more than A$10 billion of ($8.50 billion) in capital raisings last year, major property trusts have managed to put their houses in order.

"There is a scope for earnings disappointment in the broader market," said Davidson, who helps manage A$1.5 billion of assets in the Australian property trusts for BT Investment.

Australia's S&P/ASX 200 index .AXJO has fallen 10 percent so far this year, hit by euro zone worries and a proposed new tax on the local mining industry. The mining sector index .AXMJ is off about 12 percent so far this year.

Property shares have performed slightly better, with the Australian property index .AXPJ dropping 7 percent, and the sector appears to offer good value.

The property sector trades at a price to earnings (PE) of 10, compared with 14 for the mining sector and 12 for the banking sector, according to Reuters data.

Values for Austrlian office buildings in prime locations fell nearly 20 percent during the credit crisis, but have started to pick up with buyers returning to the market.

The gearing levels for the property sector dropped to 30 percent from 45 percent in the past two years, and Davidson expects at least an 8 percent return from listed property trusts.

The fund manager said industrial property plays such as Goodman Group (GMG.AX) and ING Industrial (IIF.AX) were attractive as demand for new facilities is rising.

Stockland (SGP.AX), which has exposure to Australia's strong housing market, is another of Davidson's favourites. He also regards Centro Retail (CER.AX) and Valad (VPG.AX) as underpriced.