For The Brave, Bargains To Be Had

Sydney Morning Herald

Saturday July 19, 2008

Carolyn Cummins Commercial Property Editor

THE first few weeks of the new financial year have been some of the bleakest faced by the real estate investment trust sector for at least 20 years.

The sector has been hit hard by negative investment sentiment driven by falling asset values, high borrowing costs and concern among investors that REIT managers will be looking to drop, or at the very least minimise, the 2007-08 distributions.

The outlook for the current financial year is also tipped to be flat.

But for the brave, brokers and agents are saying now is the time to buy.

Merrill Lynch's property team hosted a discussion last week and found that the industry participants were not as gloomy as other investors.

This was because the underlying fundamentals for the property market, of low vacancies and continued solid retail sales, remain strong.

"Despite softening yields, the underlying fundamentals for commercial property remain sound in all major Australian markets making it more attractive fundamentally than the US and UK markets," the broker said.

"The key factors which should support commercial property values include vacancy remaining at record lows, with commercial market demand underpinned by strength in Asian economies that are key trade partners to Australia, as well as population growth.

"Vacancy rates have fallen in all major Australia cities over the past 12 months with the exception of Canberra."

The broker's property team said that new supply should be constrained, with many planned developments put on hold due to high funding costs. This is a key difference to past property downturns, and should help sustain rents and value for existing assets.

Superannuation fund growth should continue to underpin investment in all sectors, including commercial property. Despite losses made on the equity market, fund managers are still allocating funds to property. New funds, such as the Future Fund will also drive investment.

Private equity buyers are still active in the property market, especially for assets below the $100 million mark.

Todd Canter, chief executive of LaSalle Investment Management, who is based in Hong Kong, said in Sydney this week that despite the recent weakness in the REIT sector there remained a strong appetite for the assets.

This was evidenced in the deal during the week by the Commonwealth Property Office Fund and Direct Property Investment Fund, which entered into an arrangement to sell 10 Dawn Fraser Avenue, Sydney Olympic Park.

The arrangement has been negotiated with the German fund manager Real I.S. and contemplates a sale price of $104.5 million (Commonwealth's share is $52.25 million) reflecting the property's book value at June 30 and a passing yield of 7 per cent.

Mr Canter said the returns in the direct property sector had dropped 45 per cent this year, and REITs are traded at an average 24 per cent discount to net asset value, compared with an 8 per cent premium in the past.

"The market is concluding that there's a capitalisation rate [the measure of annual income from rents as a proportion of a building's value] expansion, which is far greater than what we believe or see in the market place," Mr Canter said. "We think that there is great value to be found globally, specifically places like Britain and Australia."

© 2008 Sydney Morning Herald

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