After a period of shocking results property securities are doing well. The listed property trust sector was a surprise standout performer during the 2011-12 financial year.While the overall sharemarket lost ground, ASX-listed property trusts produced an average return of 11 per cent. Property securities funds (managed funds that invest in a portfolio of property trusts) produced an average return of 10.4 per cent.These returns were not far behind the 12.4 per cent return of the top-performing asset class, Australian fixed income.Most investors will remember listed property trusts as those conservative portfolios of commercial buildings, industrial estates and shopping centres that produced steady yields through the 1990s and early 2000s, which then turned into over-geared property development schemes that crashed badly during the global financial crisis.Listed property trusts, or AREITs (Australian real estate investment trusts) as they are referred to these days, got the wobbles in 2007, when trusts in the sector fell an average of 8.4 per cent (the sector's first negative year in eight years).In 2008 the sector fell an average of 55.3 per cent - one of the worst results for an asset class ever. At that point investors headed for the exits.The sector's turnaround in the year to June has encouraged investors to take another look at listed property securities.The question is what sort of assets AREITs are today - high-yielding and conservatively managed portfolios of high-grade properties or debt-laden schemes investing in speculative overseas projects.The property portfolio manager at asset consultant Ibbotson, Bianca Rose, says AREIT managers have achieved a significant transformation during the past four years and AREITs are now more like the sort of investment proposition they were in the 1990s.Rose says: "The AREIT sector today does not exhibit the same risky characteristics as it did leading up to the GFC. We think the prospects for AREIT performance are excellent and consider the sector likely to be one of the most attractive growth asset classes over the next five years."APPROPRIATE GEARINGRose says AREIT managers got into trouble for four reasons: they took on too much debt they moved into new areas, such as property development they started buying assets in overseas markets, where they had little experience and they paid out unsustainably high distributions, often funded with debt.Over-gearing was the biggest problem. Rose says that during the GFC it was the highly geared AREITs that produced the worst outcomes.The average level of gearing jumped from about 15 per cent in the 1990s to a peak of close to 45 per cent in 2006 and 2007.During the GFC, debt markets froze and some property trust managers were not able to refinance maturing loans.One of Australia's biggest corporate failures during the GFC, Centro, collapsed for this reason.Another problem was that as asset values fell, some of the trusts breached borrowing covenants. When their lenders asked them to repay loans, they couldn't."We believe the gearing issue is now behind us," Rose says."The sector average is now back to a far more appropriate gearing level of around 30 per cent."While 30 per cent still looks a bit high compared with the levels in the 1990s, Rose says the figure has to be considered in relation to the value of the assets.If asset values are stable and likely to rise, then the trusts can support a higher level of gearing than if the asset values are under pressure."Australian commercial property valuations appear more reasonably priced than they did in 2006-07," Rose says.The head of listed property at BT Investment Management, Peter Davidson, says another issue to consider in relation to the level of gearing is how the debt is structured.Davidson says AREIT managers relied too heavily on banks for their debt funding in the pre-GFC years, which meant that when banks stopped lending to the property sector they faced serious refinancing problems.DIVERSIFIED FUNDINGDavidson says AREITs now have more-diversified funding structures. "Average gearing has come down from around 45 per cent to 28 per cent but, just as importantly, the amount of AREIT debt that is sourced from Australian banks has come down from 56 per cent to 38 per cent," he says."One of the lessons of the GFC was that it is important to have diversified funding sources. When AREITs go to the US capital market for funds, they can take out longer-term loans than the three-to-five-year facilities that local banks usually offer. Diversification of terms is another benefit."Many AREITs got into trouble when they decided they could make extra money by becoming property developers or by taking their investment management skills to Japan or Singapore or other new market.These ventures increased the level of risk in the funds, which proved costly during the GFC.Davidson says most AREIT managers have pulled back to Australia and exited the property development business. The make-up of assets in the funds is much more like what it was in the 1990s. He says there are a couple of exceptions.Westfield is a global shopping centre manager and its expertise is recognised by institutional investors. Similarly, Goodman Group has continued to be an international specialist in industrial property management with the support of institutional investors.Rose says: "The AREIT sector today does not exhibit the same risky characteristics as it did leading up to the GFC."During the years when debt was cheap, some trusts adopted the practice of paying out 100 per cent of earnings to unit-holders and relying on debt for cash-flow needs. In some cases, payouts were more than 100 per cent of earnings.Rose says: "In 2007 the payout ratio of many trusts - the portion of earnings paid out to unit-holders - was around 100 per cent. This was unsustainable, given the need to retain some earnings for maintenance and other expenses. Today the average payout ratio is around 80 per cent, which is more prudent."The average distribution from the AREIT sector is sitting around 6 per cent, the same level as it was at the end of 2007. But there is more certainty now that this level can be sustained."Recent AREIT listings, such as Westfield Retail Trust, show that fund managers continue to focus on low-risk, premium-quality local assets. Westfield Retail Trust is the product of a demerger of 54 Australian and New Zealand shopping centres from Westfield Group in 2010.POSITIVE OUTLOOKListed property trusts have not only sorted out their problems, they are growing. The chief investment officer of APN Property Group, Howard Brenchley, says AREIT dividends grew an average of 4.6 per cent in the 12 months to December last year.Writing in a recent APN investor newsletter, Brenchley says: "With the majority of returns in the sector coming from strong and sustainable rental earnings, we are confident that well-managed, income-focused AREITs are likely to deliver a yield of around 7 per cent plus growth of 2-3 per cent to deliver a total return of 9-10 per cent in 2012."Morningstar's senior property analyst, Tony Sherlock, says an important factor in favour of commercial property is the "significant yield premium" on offer. What this means is that income yields of 6 per cent or 7 per cent from AREITs are a more attractive proposition than a government bond yield of 3 per cent or a term-deposit rate of 4.5 per cent or 5 per cent. What's more, property yields are expected to rise, while term-deposit rates are heading down.Sherlock says the big positive for investors is they are able to gain access to this yield premium at a time when the risk profile of the AREIT sector has been reduced significantly.Sherlock says: "We believe that the shift in the sector's fundamentals - more conservative management, lower gearing levels and the adoption of more conservative payout ratios - means that AREITs should have a [lower] risk/return profile for the next few years, at least. We believe AREIT funds could be attractive vehicles for investors seeking high levels of yield."Industrial property, premium retail and high-grade commercial look promisingInvestors can gain access to property trusts in one of three ways: by going direct and buying AREITs listed on the Australian Securities Exchange by investing in a property securities fund, which holds a portfolio of AREITs or by investing in an unlisted trust, such as a syndicate, which usually holds only one asset.Among the investment themes in the sector at present, the growth in online retailing is having a big impact on the Australian commercial property market. While traditional retailers face a serious challenge, growing online retailers need distribution centres.In May, commercial property group Jones Lang LaSalle published a report saying that industrial warehouses were becoming "the new shopfronts" and that strong growth in e-commerce was fuelling the demand for warehouse space.The head of listed property at BT Investment Management, Peter Davidson, shares this view.He says industrial property is the best sector in the commercial property market. He likes Goodman Group for exposure to this sector.Davidson has not given up on retail property, however. He likes premium retail and is an investor in Westfield Retail Trust."The weakness in retail is in the shopping strips, such as Oxford Street in Sydney and Lygon Street in Melbourne," he says. "We like premium malls."He also likes retail centres that meet everyday needs, and is an investor in Centro Retail Group a reconstruction of the Centro portfolio.Davidson runs BT's Property Sector Trust, which has outperformed the S&P/ASX 300 Property Index by 0.6 per cent a year in the past three years.Morningstar's Tony Sherlock favours high-grade central business district offices. He forecasts that CBD office rents will rise as much as 3 per cent in the next two years.One sector everyone is steering clear of is residential property. Sherlock says AREITs with large residential holdings or residential land banks are trading at discounts to their net asset values and face the risk of asset write-downs.The property portfolio manager at asset consultant Ibbotson, Bianca Rose, says investors can get a diversified exposure to the sector by buying four or five AREITs.She recommends GPT, which has retail, office and industrial assets Westfield Retail Trust CFS Retail Property and Commonwealth Office.Rose says: "People have their favourite sub-sectors but we like a diversified approach. Our view is that with interest rates coming down, the yields on property trusts are going to become more attractive."Solid foundations build wealthJohn Walklate has spent his career in the property industry and is the Queensland state manager of a large commercial real estate agency. So it made sense for him to steer his investment portfolio towards property an asset he feels he knows pretty well.Until 2009, the bulk of Walklate's investments were residential properties in south-east Queensland. However, that market has been in a downturn since 2010 and Walklate decided to diversify.He sold some residential property and invested in a trust managed by Sentinel Property Group, which specialises in Queensland commercial property in the $10 million to $30 million range. Sentinel's approach is to have one asset in each fund and to commit investors for terms that are usually seven years.Walklate likes the approach. It gives him an opportunity to do his own research on the property before committing his funds, something he could not do with a listed property trust that has a large established portfolio of assets.He now has investments in several Sentinel trusts, whose assets include office buildings, business parks, bulky goods retail outlets and industrial properties."I can go and see the property, get an understanding of how it is producing income, how its leases are structured and what its growth prospects are like," Walklate says.He looks for secure, long-term tenancies, high yields and some upside."One of the trusts has some vacant land that offers a development opportunity," he says.