LISTED property trusts are to investment what Lance Armstrong is to cycling.
Everyone loves a winner and over the past six years other asset classes have been struggling to stay the distance with listed property trusts.
Australian shares may have won the sprint for the best returns for the year ended June 30 but when you look at three or five-year numbers the listed property trust sector climbed ahead by providing investors with the elusive double capital growth and rising income distributions.
An investment of $10,000 back in March, 1999, in the LPT index had more than doubled by March and was worth $21,290 after fees.
But the listed property market today looks a lot different to 1999 and 2000.
There has been major consolidation among LPTs there were nearly 80 trusts back in 1999 and today that is down to about 30.
The consolidation of the market has been dramatic and Westfield alone accounts for about 35 per cent of the sector while the five largest trusts comprise 65 per cent of the sector.
The other trend that is less obvious is the domination of the market by institutional investors with super funds now owning about 75 per cent of listed property trusts.
At the same time the nature of the underlying investments has shifted and while the bulk of the return still comes from rental income, an increasing portion of the return is due to property development activity, which arguably involves more risk, while debt levels have increased from about 10 per cent in the mid-1990s to about 30 per cent now.
This raises the issue of concentration and lack of diversity within the Australian listed property trust sector and is prompting Australian investors to look overseas for new property investment opportunities.
Australian property managers are world class so this is less about their performance and more about the need for diversification and new opportunities.
The trend to diversify into overseas markets looks inevitable when you factor in the continuing demand for property assets fuelled by super fund growth from compulsory super contributions.
Longer term, the demand for|reliable income streams will increase as the baby boomer generation|moves into the pension phase of their life.
Australia and the US are the two clear leaders in terms of listed property markets.
But other countries in Europe and Asia are changing rapidly so international listed property now looks like emerging as a separate asset class in its own right.
In many ways this is a rerun of what happened with shares.
In the 1990s, there was a move to international shares driven by the need to diversify portfolios outside Australia.
The same argument applies to international property.
By diversifying offshore you can improve the risk-return trade off and just like Australia the rest of the world has been enjoying a real estate boom.
That means when you look at the returns from international property they are very good.
In the US, the comparable vehicles to listed property trusts are known as real estate investment trusts, or REITs, and the major index of REIT performance has grown 34.5 per cent in the past 12 months while the global property index is up 23.5 per cent over five years.
But with returns that high investors need to heed the warnings of people like the chairman of the US Federal Reserve Alan Greenspan last week when he talked of a property market bubble in the US, albeit mainly in the residential market rather than commercial or industrial.
So the appeal for international property is in its diversification value and the income stream from rents and investors need to be careful that they are not blinded by spectacular returns in the recent past.
Because as Lance Armstrong has demonstrated, all great rides have to come to an end sometime.
lRobin Bowerman is head of retail at index fund manager Vanguard Investments Australia.
Source: The Border Mail
Photo credit: lrumiha via VisualHunt / CC BY
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