REAL ESTATE - Australian listed property trusts (LPTs) have been steadily increasing their overseas exposure and turning their focus to Europe and Asia at the expense of the US market.
This is the finding of Melbourne research group PIR. Its analysts found that increased interest in the European and Asian markets was due in part to the greater yield differentials available relative to the US.
Whilst Macquarie Bank and Babcock and Brown have already established projects in Europe, several other LPTs including Multiplex Group and Centro Properties Group are believed to be pursuing deals there.
Offshore investments proved popular amongst Australian fund managers last year, accounting for around 75% of the reported $5.37 billion of equity raised by the LPT sector during the period. Foreign assets now account for more than 35% of the total value of property assets managed by LPTs.
Back home in Australia, the LPT sector is expected to under-perform again in 2006 according to local analysts. A 12.5% return for the sector in 2005 could not match the 20% return for the ASX index overall. On SB Citigroup’s estimates the sector will generate a total return for 2006 in the region of 5-10%, driven primarily by the sector yield of about 7%.
SB Citigroup suggests part of the reason for underperformance is the high premiums built into unit prices currently.
Merrill Lynch is even more bearish, suggesting the sector is slightly expensive and forecasting a 3.4% return in 2006, implying a yield of 7.4%. Macquarie is slightly more positive in predicting a 9.9% total return. Merrill Lynch agrees, suggesting while there may be a lack of earnings surprise from acquisitions in the sector the flow of funds into Australian LPTs will remain strong.
In the broker’s view development may be a larger driver of capital deployed this year, suggesting managers with real development skills should be able to generate standout performance.
Macquarie expects the office sector to perform well, retail to be in line and diversifieds to underperform, the broker’s preferred exposures being Centro Properties, Macquarie Goodman, Valad Property, ING Office and GPT among the larger stocks.
SB Citigroup recommends overweight positions in Westfield, Stockland, Multiplex, Tishman Speyer, Galileo Shopping, Macquarie DDR, Reckson New York and ING Community Living Fund.