LaSalle Fund Says Aussie Reits Are Good Buy Now

Source : The Business Times, July 17, 2008

Trusts hit by fears of rising financing costs arising from global credit crisis

(SYDNEY) Now is the time to pick up cheap Australian property trusts because the country's economic fundamentals are strong, according to a securities fund manager at property specialist LaSalle Investment Management.

Uncertainty: Office buildings and commercial towers stand in the CBD of Sydney. Australian Reit investors are bracing for earnings reports due to be delivered next month

Concerns are mounting about the future prospects for Australian real estate investment trusts (Reits) ahead of their earnings reports, as the global credit crisis hits financing costs for the highly leveraged industry.

Australia's property sector has dropped 45 per cent this year and Australian Reits are traded at an average 24 per cent discount to net asset value, compared to an average of an 8 per cent premium in the past.

That implies a rise in capitalisation rates - annual rent as a proportion of a building's value - of more than 150 basis points for commercial property.

'The market is concluding that there's (a cap-rate) expansion, which is far greater than what we believe or see in the market place,' said Todd Canter, chief executive for LaSalle Investment Management Securities Asia-Pacific. 'Here, we have a unique opportunity to buy some of the world's best real estate companies at an incredible discount to NAV,' said Mr Canter, noting that US Reits are trading at a narrower, 19 per cent, discount to NAV.

Capitalisation rates for Australian Grade A office buildings may widen by 50 to 75 basis points, but no more, Mr Canter said.

'We think that there is great value to be found globally, specifically places like Britain and Australia,' he added during a media briefing here.

Australian Reit investors are bracing for earnings reports due to be delivered next month. Last week, GPT Group saw its shares tumble as it slashed its 2008 earnings and dividend forecasts by more than a quarter. Other Reit prices also fell as the likes of Mirvac Group followed suit with grim forecasts.

Debt spreads for the best borrowers have widened to 110 basis points from 50 basis points six months ago, according to JPMorgan analyst Rob Stanton.

He says higher borrowing costs would cut compound annual growth rate for Reit distributions per share to 1.5 per cent from a previously forecast 2.8 per cent over five years. -- Reuters