Tough times ahead for listed property

Big research house Standard & Poor’s has said Australia’s property securities managers face another challenging year.

In its latest annual review of the sector, S&P said volatile market conditions and weaker economic conditions will “hamper valuations on the nation’s listed property stocks”.

The Australian real estate investment trust (A-REIT) sector saw a severe listed market correction over the past year, with the median-rated property securities fund manager unable to outperform the benchmark.

S&P said the ongoing effects of the credit crisis have been driving the property securities markets rather than property fundamentals, “which have — until recently — been sound”.

“Real-estate securities in most global markets (including Australia) are now trading at a discount to their net asset value,” the report said.

“Property fundamentals are expected to be tested by softening global economic conditions, and it is likely that pressure on real estate valuations will continue for at least as long as there is global credit market uncertainty,” S&P Fund Services director Peter Ward said.

“While the recent interest rate cut should help the sector, market volatility is likely to continue, at least in the short term. This points to a highly challenging period ahead for property securities fund managers.”

The S&P report notes that the Australian listed property sector is concentrated in relatively few stocks, and is exposed “not only to relatively stable property income, but also to more volatile revenue streams and offshore property markets”.

“Nevertheless, S&P is pleased that most of the REIT teams have stabilised over the past two years after a period of high personnel turnover.”

Furthermore, the review found that the more highly rated managers have enhanced their investment processes “to ensure that the complexities and risks within the sector are analysed and incorporated and that an appropriate focus on credit-related issues is maintained”.

The S&P review of the Australian listed property securities fund peer group covers 24 managers offering 26 strategies. S&P affirmed the ratings on 18 funds, upgraded three funds, downgraded one fund, and assigned ratings for the first time to four funds.