Australian-listed property is having a remarkable resurgence. Last year it was the best-performing sector of the Australian sharemarket, with a total return of almost 33 per cent compared with 20 per cent from the broader market.
That’s impressive, but cold comfort to investors who lost so much money when the listed property sector imploded during the worst of the financial crisis.
Over the past five years, the average annual return of the sector is minus 8.7 per cent.
There are three main reasons for the turnaround in listed property.
First, listed property had performed so badly that it just had to recover. Second, foreign investors have been buying our trusts because of the continuing problems in the US and Europe. Third, Australian investors continue to chase yield on the sharemarket as interest rates fall.
The reason that listed property had fallen so heavily – it dropped 54 per cent during 2008 alone – had nothing to do with the underlying properties held by the trusts. It was the complex corporate structures of many of the trusts. They had funded forays into overseas property by borrowing. They changed their spots from being mostly about rent collecting to increasing exposure to riskier ventures such as property development. During the GFC and the credit crunch, rolling over their debts became more expensive and the market marked down trusts with complex and debt-laden balance sheets.
The trusts, which are known as Australian Real Estate Investment Trusts (A-REITs), have produced a steady income of about 6 per cent for each of the past three years – not bad with a cash rate at 3 per cent.
They have also cleaned up their balance sheets and been more careful about their development and construction activities.
But the trusts are not going to return to what they once were. That does not make them bad investments; sensible property development can add a lot of value. But they are riskier investments than they were in the 1990s, so caution is needed.
In fact, the trusts have proved so popular with investors over the past year that the market capitalisations of some companies are higher than their asset backing.
The high Australian dollar is also acting as a drag on the economy, and tenant demand for commercial property is not particularly strong.
However, rental leases typically run for six to seven years, which should make the 6 per cent income from the trusts fairly secure.
The original release of this article first appeared on the website of Hangzhou Night Net.