Listed property trusts are back. Over the past year the prices of Australian real estate investment trusts (A-REITs), as they are known, are up about 10 per cent
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Led by one of the giants of the sector, Westfield Corporation, which owns shopping centres around the world, the sector has had a particularly strong October and November.
The share prices of those with overseas exposures have been helped along by the weaker Australian dollar, as a weaker dollar increases the value of the trusts' assets in Australian dollars.
Foreign investors have also been investing in Australian property directly as well as in the A-REITs.
Big overseas funds, such as pension funds, have been able to borrow money very cheaply, with interest rates in the US for example at near zero, and invest in A-REITs on yields of 6 to 7 per cent.
The performance of A-REITs is leading some to recall the massive run-up in prices in the final phase of madness before the GFC. The trusts borrowed heavily against their real estate assets to turbo-charge their "lazy" balance sheets.
They went on a buying spree during the boom years before the GFC.
They diversified into property development and funds management. It was very different to their role in the 1990s when they were primarily passive collectors of rent.
The sector destroyed more shareholder wealth than any other sector of the Australian sharemarket during the GFC. The assets, the properties themselves, were never the problem. Several trusts went to the corporate undertaker with their properties on-sold.
During 2012, it was the best-performing sector with a total return, including income, of more than 30 per cent. It seemed the sector was off to the races.
But during 2013, the sector was flat, as there was talk of higher interest rates, before coming back to life this year.
Analysts say the trusts are much less risky than before the GFC as their gearing levels are now much lower. However, the trusts are particularly vulnerable to a rise in interest rates.
With the cash rate at a 50-year low of 2.5 per cent, rates will return to normal levels. Most analysts are not expecting a rate rise until the second half of next year.
Property trusts are mostly yield plays. They generate a steady income yield of 6 to 7 per cent with capital growth of 2 to 3 per cent over the long term, or total returns averaging about 8 to 10 per cent a year.
Tony Sherlock, a real estate equities analyst at researcher Morningstar, says higher rates could be bad new for the trusts as, among other things, investors switch to other investments paying relatively higher interest rates.
Also, the trusts will be paying higher interest rates as their debt rolls over. But it is swings and roundabouts.
The Reserve Bank would most likely raise rates because the economy is strengthening, with stronger employment and more demand for property, resulting in higher rents for office property, for example.
Winston Sammut, the managing director of Folkestone Maxim Asset Management, an A-REIT fund manager, says the key reason for the good performances is low interest rates.
He believes foreign investors have sometimes been over-paying for Australian real estate.
To foreign investors, the prices paid are rational because they are able to borrow cheaply and have very long investment time-frames.
They are investing more for the attractive yield than for capital gains. The danger is that A-REITs, as they compete against foreign investors for prime real estate, may over-pay, Sammut says.
Sherlock says almost of all the trusts are now "fairly" or "fully" valued. He has only three positive recommendations.
He likes Goodman Group, which has an Australian and global portfolio of industrial property.
He also like the retirement-living specialist, Aveo Group, and Hotel Property Investments (HPI), which owns a chain of pubs, mostly in Queensland, which are leased to subsidiaries of Coles.
Sherlock says there is value in each of these trusts at current prices.
