Saturday, April 14, 2007

Trusts dip as punters bet on equities

Trusts dip as punters bet on equities
Florence Chong
April 12, 2007

A SURGING Australian dollar, low property yields and the sluggish US economy have led investors to desert listed property trusts in favour of safe-haven stocks.
Investors are concerned that close to 40 per cent of LPTs' assets are located offshore, particularly in the US, according to stockbroking analysts.
With LPTs' offshore income earned largely in US dollars, investors have become wary of how the strong dollar may affect earnings. The dollar reached a 17-year high yesterday, touching US82.67c.

However, these analysts also pointed out that, without exception, LPTs with overseas assets hedged their exposure precisely to avoid currency fluctuations.

LPTs have rolling hedging programs to protect their foreign currency income and some even hedge their capital investment.

Investors also hold concerns over the emerging weaknesses in the US economy.

Although the LPT sector reflected the volatility in the general equities market, analysts said the sector fell more sharply in March.

The average return was minus 4.1 per cent and the sector lagged the broader equities market by minus 7.48 per cent (the lowest since October 1993), according to a JP Morgan research note.

Analysts said the sector was sold down in the wake of concerns about the US economy, rising interest rates and falling property yields.

A significant factor was the outflow of funds as international investors fled the Australian market for safer havens.

Property Investment Research analyst Bhavin Patel said there was also a perception that property had become overheated, pointing to Centro's New Plan Excel deal, which was struck on a yield of 6.7 per cent.

JP Morgan said pricing remained the main issue for LPTs, with yields relative to bonds/cash more stretched than ever.

Pengana Capital's fund manager Mike Thorpe-Apps, who manages $1 billion in property securities investments, said larger investors deserted LPTs in March, moving their funds to general equities.

"We've also seen international players pull out of LPTs and go to the more defensive markets," he said.

A lack of new floats had also been blamed for the sector's softness.

One potential listing - Tokyo-based New City Corp, which was to raise around $200 million for an ASX-listed trust seeded with around $350 million of Japanese office buildings and shopping centres in Tokyo - had been deferred or cancelled.

There was a rash of new raising early in the year with new issuance for the first quarter totalling $2.6 billion, representing 71 per cent of the total raisings last year, JP Morgan said.

Mr Thorpe-Apps said the market had recovered in April, clawing back most of the March losses.

And Mr Patel still expected returns to be "reasonable" this year, but he said it was highly unlikely they would reach last year's total average return of more than 33 per cent.

JP Morgan said overall total returns for the sector were expected to be 7 to 9 per cent in 2007.

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