Risk Creeps Into Market Refuge

Sydney Morning Herald

Monday March 12, 2007

Stuart Washington

PROFESSIONAL investors and analysts have attacked the increasing complexity and risk associated with property trusts, raising serious doubts about the sector's reputation as a defensive safe haven offering good yields.

After a results season in which property trusts' profits rose about 7 per cent on the previous period, questions were being asked amid perceptions of increasingly risky tactics.

Deutsche Bank analyst Matthew Bertram wrote on Friday: "There is a wide variance in the quality of results amongst the majors. Mirvac Group and Investa Property Group booked asset sale profits offsetting residential weakness, while Centro Properties Group and GPT's acquisitions have been in part funded through off-balance-sheet geared structures."

The head of investment markets research at Colonial First State, Hans Kunnen, said changes in the sector had been profound. "About 40 per cent of domestic listed property trusts are offshore assets. Leverage has changed, the structure has changed," he said.

In the Centro example, analysts have criticised the disclosure and complexity surrounding Centro's $US6.9 billion ($8.85 billion) purchase of US real estate business New Plan Excel.

In a note last Thursday, Credit Suisse analyst Andrew Rosivach estimated the level of debt in the acquisition at 96 per cent and raised questions about the deal.

Among his concerns was Centro's announcement on February 6 to sell its stake in its trust, Centro Retail Group, to its own direct property funds for a price of about $1.88. Then on February 28 Centro announced, as part of the New Plan Excel acquisition, a rights offering of Centro Retail Group units at $1.72 a unit. Mr Rosivach has a price target of $7.60 on Centro, which closed at $9.42 on Friday, up 9c.

Underpinning the criticisms of listed property trusts' business models is a recognition that most property trusts are no longer the simple business of placing a group of commercial real estate assets into a trust and distributing the rental income to investors.

"It's no longer a straight yield play," said Perpetual chief investment officer Emilio Gonzalez. "It increases the complexity of where earnings come from."

Faced with a relatively small Australian market, in the past five years property trusts have become aggressive off-shore investors.

Business models have also changed as property trusts have merged with developers (as is the case with Multiplex), increasing their risk profile. They have also engaged in increasingly sophisticated financial engineering to boost their profits as they expand offshore.

Practices that have become common include hedging the asset value of offshore investments against currency risks, making money on what is known as the foreign exchange "carry". In the view of many, including some trusts, this is a currency trade with the very real potential of the hedge moving against the trust.

Property trusts' lack of safe-haven status was dramatically demonstrated in the recent correction, when the fall in the broader market was echoed by a fall in the unit prices of property trusts, which have generally run up strongly in the past year.

© 2007 Sydney Morning Herald

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