January 23, 2008

Better than cash

Listed property trusts have been seriously damaged as an asset class during this current market fall. Centro has been the horror story, starting the downward slide for LPTs.

The flipside to this story is that yields in LPTs are now starting to look attractive: across the sector the average yields (following the stockmarket’s sharp declines earlier this week) are about 7.4%.

Now here is an interesting point of comparison: A good cash account is now paying 6.25% to 6.8% while the average listed property trust yield is 7.4%. The income from listed property would be expected to grow roughly in line with inflation over the long term; cash income does not grow. LPT income often pays a tax-deferred component, making it more tax-effective that the income from a cash account.

In a roundabout way the collapse of Centro makes LPTs a more transparent sector, as analysts have been poring over the balance sheets of all the listed property trusts looking for the “iceberg” of debt that sank Centro.

Analysts and commentators have been warning of two risks in LPTs for some time: the growing levels of debt, and construction risk. Centro has provided a demonstration of the problem of poorly managed debt; and Multiplex revealed construction risk through the problems it faced with the Wembley Stadium construction. However, quality listed trusts with reasonable debt levels, limited exposure to construction risk and now paying a growing income stream that is superior to cash will start to look attractive to many investors.

The following material was included with Adele Ferguson's article - Value Hunters Scour LPTs - in the Eureka Report, 23rd January 2008.