Australians love residential property. It’s the quintessential Australian dream to own bricks and mortar.
But when it comes to property shares, Australians seem to have more of a hate relationship. Part of that comes down to the losses endured during the Global Financial Crisis (GFC).
But do property trusts deserve their bad reputation?
Once upon a time, a listed property trust was a relatively safe, simple structure. The trust owned properties (obviously) and was geared to own those assets. The rent or income earned from the properties was then distributed to security holders.
And then the GFC hit.
The change in the property sector actually happened before the GFC. Easy money and greed hit the sector. That meant some previously conservative property trusts which owned and managed property evolved to become property developers.
Of course, property development is a different ballgame to simply owning property. It’s the difference between a person who buys an investment property and gets a tenant in, compared with a person who buys a piece of land to build a property from scratch. There is much more money to be made from property developments but also much more risk.
So some property trusts embarked on the journey to become property developers. And almost all property trusts were heavily geared. Then the GFC turned off the availability of funds, investors ran from risky investments — especially geared investments — and we saw a sell out of assets.
The result was that property was the worst performing sector during the GFC. Here are some interesting stats:
While we’ve only been talking about listed property trusts, unlisted property trusts may have fared even worse. A number of unlisted property trusts were frozen to prevent investors from cashing out. The reason that this occurred was that in order for investors to be able to take out their cash, assets had to be sold. Property unfortunately is an illiquid asset and can be difficult to sell, forcing some managers to freeze redemptions.
The good news is that the GFC has once again seen a return back to more conservative gearing levels and the traditional business of owning, managing and making an income from property. Property companies have re-capitalised balance sheets and once again are starting to look like the property trusts of old.
The property sector is still in recovery mode and the next few years are likely to be focused on reducing the falls in asset valuations and rebuilding distribution yields.
With the Australian economy much stronger than its peers overseas, it’s going to be a less bumpy ride in investing in property companies which are focused domestically, rather than in Europe or the US.
If you are a fan of buying near the bottom of a cycle (which I am!) then 2010 may be the time to consider the property sector.
Here is a list of property companies that are focused on the Australian market that might be worth considering:
Happy trading!
Julia Lee Equities Analyst Bell Direct
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