Research: Listed property trusts still remain attractive

So what has driven the growth of our listed property sector, how has it developed over the past year and what comparative investor trends are starting to emerge between both New Zealand and Australia?

Firstly, over the past year the New Zealand listed property sector has grown in number, with the introduction of a further nine listed vehicles, typically as a result of managers wishing to provide more liquidity and better income returns from improved rentals to existing unit holders. In short, when creating a listed vehicle, the manager provides a closed-end product that is no longer required to maintain a certain percentage of unit holders funds in liquid assets as part of its management process of investor cashflows. As a result, the manager has the ability to increase gearing, enhancing focus which in turn allows the company to purchase further investments that provide better rental income returns while providing improved investor liquidity.

Secondly, the easing in late 1998 by most international Reserve Banks, to combat Asian economic concerns, combined with a reducing inflation outlook in New Zealand and Australia, sparked a resurgence, albeit somewhat delayed, in certain listed property stocks in both countries as investors switched away from low earning fixed investments, or weak commodity stocks with Asian exposure, to the higher yielding property sector. Currently property yields remain higher than returns investors are likely to receive by investing in fixed term deposits, although this benefit is diminishing on a risk/return profile, as rates rise in both countries and tax concerns on listed property trusts across the Tasman continue to place pressure on securities listed in this sector.

Due to the size of the Australian property sector stocks tend to trade at, or above, asset backing with a premium often being attributed to higher liquidity, although uncertainty with current tax legislation regarding listed property trusts has placed this sector under pressure in recent times. Other than the sheer size of the property industry and its associated liquidity, Australia is also denominated by large retail orientated companies and as a result most economic and industry concerns relating to this country also apply to New Zealand, low interest rates, an improved outlook for employment growth leading to increased consumer confidence.

With the expectation of a continued low interest rate environment and improving consumer confidence, why should someone invest in listed properties and not purchase directly? A worthy question with an answer that should come as no surprise. For one, by investing in a listed vehicle an investor is provided with more diversification, potentially lower fees, superior liquidity, a market price that takes into account the value of the underlying properties and a manager whose time is allocated wholly to improving income returns by way of improving tenants, leasing, refurbishment’s, redevelopments and marketing of the properties.

Furthermore, generally asset allocation to the property sector would typically be 10 per cent, making it somewhat difficult to achieve a diversified exposure within the sector if an investor wishes to purchase direct.

The down side of investing in listed securities is that company share prices may not always reflect the transparency of the underlying assets but may often be at the mercy of a change in investor asset allocation. This has been the case in recent times in both New Zealand and Australia, although regarding the later we are starting to see increased fund flows back into the sector.

There are many ways to invest in property, direct, property syndication, unlisted funds and listed funds. The sector remains attractive for those wishing to achieve a steady income stream and given the expectation for local interest rate to remain low for some time, we see no reason for this to change.