REIT investors await reporting season with dread

IT HAS been a dark week for real estate investment trusts, and the outlook is grim for months to come. Pushed to heady heights by investors who have enjoyed annual returns of 20 per cent or more for the past five years, REITs have crashed harder and faster than anyone expected.

IT HAS been a dark week for real estate investment trusts, and the outlook is grim for months to come. Pushed to heady heights by investors who have enjoyed annual returns of 20 per cent or more for the past five years, REITs have crashed harder and faster than anyone expected.

That has prompted speculation of another round of mergers and acquisitions but - unlike during the last frenzy of consolidation in 2004 - raising the cash for offers this time around is significantly harder.

Property circles were buzzing yesterday with talk that Dexus Property Group may use its $3.6 billion market value to make a play for Valad, worth $852 million. Dexus shares fell 10.5c to $1.21 yesterday, while Valad defied the market and rose 1c to 53c.

It was also suggested Dexus might have to issue earnings and asset-value guidances, given its exposure to the hard-hit European office markets.

Property market analysts are reviewing groups such as Lend Lease and Stockland, and smaller vehicles including ING Retirement, FKP and Babcock & Brown Communities as they approach the 2007-08 reporting season.

Merrill Lynch's property team said it was most concerned about the forecasts for Australand, GPT, Lend Lease, Macquarie DDR Trust, Macquarie CountryWide, Mirvac and Valad. It also said Centro and Rubicon Europe were on the brink of bankruptcy.

"The 2009 guidance (for all the above stocks) will likely disappoint due to poor quality earnings in prior periods, poor operating markets, and/or high gearing; some may be forced sellers," Merrill Lynch said.

"Overall across the industry, we are forecasting minus 1 per cent distribution per unit and plus 0.8 per cent earnings per unit growth (unweighted averages)."

The ASX/S&P property index fell 13 per cent in the first two days of trade this week, after GPT downgraded its earnings for the year to December by 27 per cent. Of the top 20 price declines on the sharemarket yesterday, nine were REITs.

On a performance basis, UBS Property Securities Fund's return was down 12.6 per cent in June and 48.8 per cent for the year. Colonial First State's fund was down 13 per cent last month and 42 per cent for the year to June 30.

The sector continues to face debt refinancing issues in an environment of high interest rates.The S&P/ASX 200 Listed Property Accumulation Index fell 10.9 per cent last month, for a fall of 36.4 per cent over 12 months.

Maxim Asset Management's managing director, Winston Sammut, said investors were awaiting the release of full-year results, due next month, for greater clarity on asset valuations and the outlook for property.


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