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Hot property

Listed property trusts are coming back into favour. Philip Macalister looks at the issues.

Thursday, November 20th 1997, 12:00AM

by Philip Macalister

Property has certainly been an "in" investment for the past three years and it looks like its getting hotter with a raft of upcoming public offerings.
New Zealanders have poured hundreds of millions of dollars into property, primarily through unlisted vehicles since 1994. It has been estimated that there are about 44 unlisted property vehicles in New Zealand with a combined net asset value of around $1.2 billion.
Now there is a plethora of listed offerings coming up. Leading the way are AMP Investments with its $500 million New Zealand Office Trust, and the Kiwi Development Trust which seeks to raise $144 million. Following on from these two offers are proposals by Trans Tasman Properties for its New Zealand Growth Property trust, the possible float of Government Property Services, Waltus Investments' planned $140 million listed trust and Pacific Capital Assets with the Britomart development in downtown Auckland.

A key feature of this revolution is securitisation. While it's not a sexy term it certainly makes property more attractive to investors.
Securitisation involves moving the property assets from a private to a public ownership structure, such as a listed trust, and that gives traditionally illiquid asset class liquidity.
It's not a trend that is unique to New Zealand; in fact we are following countries such as Australia and the United States where there are many listed property vehicles. (In the US they go by the name of Real Estate Investment Trusts or REITs).
While REITs have been considered boring, and lack lustre investments in the past they are now piping hot and, as a sector, have grown from US$13 billion to US$116 billion in the past six years. What's more they have performed well, with the benchmark REIT index outpacing the S&P 500 in four of the past five years.

Why is listed property in vogue?
According to AMP Investments managing director Roger Greville property is under-represented on the New Zealand sharemarket.
Currently it accounts for less than 4 per cent of the New Zealand market's total capitalisation, while in Australia property companies make up 7 per cent of all Australian industrials.
Greville says considering property should account for anything between 5 and 15 per cent of a diversified investment portfolio there is a shortage of supply.
He says there is plenty of scope for more property vehicles to be listed in New Zealand.
The other key factor he cites is the ease of access into and out of property which securitisation provides.
This access is one of two key points of differentiation between the listed and the unlisted trusts.
By listing investors have a way to exit their investment, while people trying to sell out of an unlisted trust may have difficulty finding a buyer and the price is likely to be determined by factors other than the asset's fundamentals.
This ties into the second point of differentiation. That is the current round of offerings (the first two in particular) are generally of much superior quality than what has been put out on the unlisted market.
Whakatane-based member of the Stock Exchange Brent Sheather says the move to listed trusts may have no impact at all on their unlisted cousins.
However, if investors realise there are advantages of scale, liquidity and asset quality in the listed trusts then there could be a shift of investor preference.
Such a move would provide a "rude awakening" for many people, he says.

More choice
With the increasing number of property funds being brought to market investors are being offered the chance to diversify and specialise the property part of their investment portfolio.
In many ways it is similar to having a group of sector funds to choose from.
Again this is a trend which is evident in the US where trusts have been established for all manner of property holdings, including residential, mobile homes, apartments, prisons and hotels.
Of the latest offerings AMP's New Zealand Office Trust is being unashamedly promoted as "a true to label" prime CBD property trust owning six high quality CBD buildings in Wellington and Auckland.
Kiwi Development Trust (KDT) is quite a different proposition as it is a property development trust, as opposed to a fund which owns and manages an existing building.
These two trusts also highlight another important distinction for prospective investors. The NZ Office Trust is geared towards providing shareholders with a regular and steady income stream through a combination of shares and convertible notes, while KDT (as the building is not yet built) has no income stream until completion around December 2000, and it offers investors the potential for capital gains.
Other examples of specialisation in New Zealand include the successful Calan Healthcare Properties, which while unlisted at present has indicated a listing is probable, to the unlisted residential property trust promoted by financial planning firm Reeves Moses.

Securitisation also is impacting on the way investors value property assets. Sheather says that the most appropriate valuation method is through the sharemarket rather than the more traditional approach of using valuations.
In the past actual realisation prices have differed quite significantly from valuations. For evidence of this one needs to look no further than the crash in the Australian unlisted property sector during the early 1990s.
Sheather says the emerging trend is that people are starting to consider property values need to be based on a combination of what is happening in the both the bond and the equity markets.
"There is now a recognition, in the US and Australia at least, that, as a determinant of the value of an income stream from a property, capitalisation rates are to real estate what price-earnings ratios are to stocks and current yields are to fixed-rate debt instruments."
Because of their role in pricing real estate assets, they must reflect investor opportunity costs in the broader capital markets.
Sheather says the sharemarket is the best tool for measuring risk.
Greville says listing a property doesn't change the way it will be managed as the same skills are required.
"The nature of the asset hasn't changed."
It just makes property much more user-friendly for investors, large and small.
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