Property trusts driving out of the gloomCAROLYN CUMMINSFebruary...

Property trusts driving out of the gloom
CAROLYN CUMMINS
February 2, 2010

AFTER one of the toughest years in its history, the real estate investment trust sector is heading out of its gloom, although the road ahead still has some potholes, according to ratings agency, Moody's Investor Services.

The sector has one of the highest levels of investors given the tax-free status of the trusts, but in less than 18 months has lost close to 50 per cent of value in not just share prices but also in the underlying value of the property assets.

The first signs of any improvement will be revealed over the next two weeks when the trusts report their operating results for the six months to December 31.

The fund managers are expected to be more upbeat than a year ago, but analysts are expecting the words ''cautiously optimistic'' to be used extensively when making comments about the outlook for the coming months.

In its annual report on Australian-based REITs, Moody's says that while they are recovering, the rest of the world's malaise, and particularly that of the US, will dampen business activity and sentiment.

Moody's report has appeared two days before the Property Council of Australia issues its own bi-annual outlook for the national and regional office markets. It is expected the PCA will show flat, and in some cases falling, vacancy rates in capital cities including Melbourne and Sydney.

The vacancy level in Sydney stands at about 7.7 per cent, according to the last official PCA figures from July.

In Melbourne, it is at 4.8 per cent, according to the PCA.

''As consumer and business sentiment has improved, major tenants are rehiring and retailers are resuming plans for expansion, developments that will need additional retail premises and support from warehouse and distribution facilities. This will support demand for rental space,'' the Moody's report says.

''We expect earnings to recover gradually in 2010, barring major unforeseen events. But the year ahead holds considerable uncertainty, with the developed world recovering only slowly from one of its sharpest recessions.

''Domestically, we see challenges with higher interest rates, a persistently strong Australian dollar, and signs of emerging input-cost pressures.

''The tailing-off of the effects of supportive government cash hand-outs will also have a pronounced impact on consumer demand.''

A year ago, the REITs were in the throes of raising capital to keep their businesses afloat.

In total $20 billion was sought from trust investors via the sharemarket. That was due to the fact that the banking sector stopped lending to many property developers, causing a standstill in developments across the country.

Moody's analysts said capital management remained a key rating factor for the next 12-18 months, and how the sector responded to potential shareholder pressure to increase returns amid easing operating conditions.

''From a ratings perspective, a key challenge is assessing the extent to which improved financial structures represent a structural shift, rather than a temporary response to cyclical challenges.''