The Australian Financial Review
www.afr.com.au

Direct better than listed sector: ADPIA

By Matthew Cranston
Tues 10 March 2009

Direct property is in a better position than Australia’s listed property sector to withstand the current cycle of falling property valuations, according to the Australian Direct Property Investment Association.

ADPIA president Linden Toll said the simplicity of unlisted property investments as well as their illiquidity and returns being driven by income rather than sentiment meant that the sector could withstand the difficult conditions.

“The REIT (real estate investment trust) or LPT market has evolved from simple, property syndicates to complex, stapled structures, often with large offshore exposures,” he said.

“The pricing of these investments is set by the stockmarket and just one trust is responsible for a major portion of the entire index, which then affects the value of all other trusts.”

Commercial property values have dropped by about 10 percent since their peak in December 2007, while over the same period the benchmark S&P/ASX 200 REIT Index has fallen almost 77 per cent, to its new low close of 546.9 points yesterday.

“Direct property investments, by contrast, are often based on single building syndicates, with the return to investors stemming from yield, with some level of capital growth. Most investors in direct property have a long term horizon,” Mr Toll said.

LandMark White chief executive Brad Piltz believes that listed vehicles have more volatility and hardship to contend with but said a lot of the difference was timing.

“If you happen to be in a closed-term fund that wasn’t due to finish for another 5 years then you don’t have to sell.  So then you are not putting that property to the market in what we would argue is potentially the worst market we have seen in 17 years,” Mr Piltz said.

“On the other hand, if you had a direct fund that was finishing up today and all the unit holders voted to sell it today then it is just as susceptible.

How well the vehicle trades will be significantly different to how that vehicle is structured and managed.”

Mr Toll said that although the yield might take a short term hit, if investors had chosen quality assets with conservative gearing, then they could remain confident of that particular investment’s long-term viability.