Hold tight, this could take a while

It was a fair question, because GPT has lost momentum in the businesses that were meant to be its new sources of growth. Its older core - Australian retail, office and industrial property portfolios - are still solid, and their expected income contribution this calendar year was upgraded, by 2.8 per cent. The weakness is mainly in the new, offshore businesses: a $7 billion European property joint venture with Babcock & Brown, a European property fund management business that was meant to sit symbiotically with it, and a retirement home division in the United States.

Lyons answered by saying that GPT was trimming its sails, but not changing tack: its future was still in owning real estate, developing properties for resale and managing property and property funds. Nevertheless, GPT's downgrade highlights strong headwinds for the property sector, and it is another reminder that what began a year ago as a banking and financial sector crisis has evolved into a general malaise.

Scarce credit, higher funding costs and a reluctance by buyers to move from the safety of cash to property have extended the financial market freeze to the property industry globally.

It is too soon to declare whether this is temporary, and that is part of the problem.

Compared with stated net assets, shares in property groups can now be bought at huge discounts. After yesterday's losses the property trust component of the ASX 200 index is down 34.77 per cent in 2008, 42.3 per cent in the past year and is at its 52 week low. GPT is down 48.8 per cent this year, is 59.5 per cent below its 52-week high, of $5.11 at the start of October last year, and 45 per cent belowthe group's stated net assets of $3.86 a share.

But just as beaten-down industrial company share prices here and overseas reflect uncertainty about earning power, the discounts to net assets in the property sector reflect uncertainty about the solidity of valuations. GPT's downgrade sums up the key questions: to what extent has demand slowed, how long will it be depressed, and what do the answers to those questions mean for the develop-sell-manage property industry model?

GPT's expected profits from development activities this year have been lowered from $88 million to $29 million to reflect a sharp fall in big property sales. Its expected earnings from the European joint venture with Babcock have been trimmed from $141 million to $125 million to reflect weaker European prices and "abnormally low" activity. And its European funds management operation is expected to book a loss of $15 million instead of a profit of $26 million.

These are all aspects of the same problem: the sharp slowdown in property investment and sales activity caused by the crisis.

Lyons says GPT and Babcock still plan to accelerate a sale of joint venture properties. He says the venture is not a forced seller, because income is covering debt service charges. But demand is palpably weak, which puts a cloud over the timetable for the return of the $2 billion in capital that GPT has tied up in the venture, and the plan to sell everything and wind up the fund by 2010.

The US retirement home division's expected contribution has been cut from $24 million to $15 million to reflect lower occupancy levels that are a result of the US housing market downturn: customers need to sell their homes to raise retirement home entry costs, and house sales are taking longer.

Lyons said yesterday he thought Australian property prices were holding up in the crisis and said mark-to-market writedowns for the June half in the US retirement accommodation business, the joint venture with Babcock & Brown and the European funds management business would probably not be material for a group of GPT's size.

The caveat is that there are so few asset sales occurring that the benchmarks lack solidity. The real effect on valuations of the downturn in the industry will not be apparent until the end of the year, and possibly later - which is why property shares are weak and why GPT's shares fell almost 15 per cent yesterday.

mmaiden@theage.com.au