Purging's over: property trusts to show a cleaned pair of heels

After years of bringing on debt and going on wild expansion forays, the sector has cleaned itself up and is selling or recycling assets, conducting share buybacks and maintaining a high payout ratio of 80 per cent. It goes a long way to explaining the solid performance of the listed property trust sector, A-REITS (Australian Real Estate Investment Trusts), in the past 18 months: up almost 10 per cent in the year to December 31, versus minus 9.7 per cent for equities, and up 12 per cent since January, compared with a fall in the market of 1 per cent.

Renewed interest in the listed property trust sector comes as the spread between property yields and bonds has blown apart. The widening gap has been helped largely by the Reserve Bank's move to reduce the official interest rate by 75 basis points in the past two months.

A-REITs are trading on a yield of more than 6 per cent, compared to the 10-year bond rate of 3 per cent. This gap is twice the long-term average, according to REIT analyst John Kim at CLSA Asia Pacific Markets. On a global stage, this puts Australia's listed property trusts on one of the highest yields and has attracted interest from self-funded retirees, wealthy individuals and super funds chasing defensive stocks with high-dividend yields.

And while global equity markets continue their roller-coaster ride and a series of M&A deals have been postponed due to a drying up of credit markets and lack of appetite for risk, the property sector sits and waits.

In the past year consolidation in the sector reduced the number of REITs from 24 to 19 and in a recent report Standard & Poor's suggests that further rationalisation is likely, given the discount to net tangible assets that most trusts continue to trade.

Industry talk is that when Europe settles down after the Greek elections on June 17, a number of big property deals will come to fruition, including the sale or break-up of FKP Property Group and its retirement village assets the sale of the newly listed Centro vehicle the sale of Dexus Property Group's remaining $500 million of US and European assets and a takeover of Mirvac or Commonwealth Office Property Trust.

The big listed property trusts, with cleaned-up balance sheets, are under pressure to get bigger to become more relevant and show a solid earnings growth profile in the next 12 months.

But not all segments of the property market are doing as well as others. The star of the sector is industrial, while office and consumer-linked REITs (residential and retail exposed) are facing some headwinds. In the case of retail, a number of projects are expected to be deferred due to retailers not having the capacity to expand.

For instance, CFS Retail Property Trust deferred a $130 million development project at Castle Plaza and $35 million at Eastlands. The deferral was attributed to retailers in these centres having reduced capacity to participate in redevelopments, given the difficult retail conditions. Given retail has not improved, with recent downgrades in David Jones, Myer and others, the retail development pipeline is likely to be curtailed.