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Technically Speaking: Property stocks show volatility

Friday 8th September 2000

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St Lukes Group

Colonial First State

Property for Industry

Trans Tasman Properties

Rationalisation of the oversupplied listed property sector continued last month with the $570 million takeover of St Lukes Group by Australian-based Westfield Trust. St Lukes was another top-40 company to join the ranks of Nufarm (Fernz), Lion Nathan, Fletcher Paper and Brierley Investments in its primary listing and shareholder control moving offshore.

Once the rest of the Fletcher companies have been flicked, New Zealand will be left with a lopsided sharemarket with much of its listed capital concentrated in volatile Telecom and the next-largest rival, Carter Holt Harvey.

It is a sharemarket that may have too much property. Arguing against that, a lift in prices for some remaining property shares has been attributed to portfolio-driven investment by fund managers who cashed out of St Lukes.

The charts show this increase for Colonial First State and Property for Industry, although the debt-strapped Trans Tasman Properties has been left out of the afterglow of the St Lukes exit.

It should be alarming for investors that capital rotation should boost shares without any underlying improvement in asset values. The implication is the share price has moved out of alignment with asset value and should correct back down again.

In many cases property portfolios are being written down and the new SSAP17 accounting standard, which requires properties to be valued according to the actual market conditions for sales as opposed to multiples of rental return, will further exaggerate share price volatility. An additional effect will be to chop back the pernicious tendency for property promoters to liken commercial real estate to fixed- interest investments.

Some felt St Lukes went too cheaply at 170cps but Westfield may have guessed the timing correctly for picking up the company for a song. St Lukes chairman Bill Falconer claimed the outlook was flat for retailing over the next two years; this would suggest a constraint on rental increases. Upgrading shopping malls would require capital injection at a time of stagnant rents and Westfield reckons it is big enough to rake up $1 billion needed to pay for redevelopment.

It will have to hope for eventual repayment of what it describes as its vote of confidence in New Zealand.

Mr Falconer's gloomy prognosis for retailing was borne out by an article in the Bulletin (Aug 22) that predicted Westfield, valued at $A5.6 billion, would be squeezed by a general downturn in shopkeeping. Over the past three years Westfield has averaged a total return of 13.4% a year for its investors versus 10.1% from the all ordinaries index. That track record may not continue despite guarded assurances from the company's managing director, Stephen Lowy, who conceded retail sales growth was slowing down.

Intriguingly, rather than being seen as a vote of confidence in New Zealand, Westfield's move here from across the Tasman had a different motive attributed to it by Jones Lang Lasalle's associate director of research, Craig Plum. He suggested the expansion was portfolio-driven from problems in Australian retailing.

"Even Westfield has had to move offshore for new opportunities as Australia becomes saturated with retail," he said. So did Westfield jump or was it pushed? With hindsight St Lukes shareholders may be glad they were bought out from an ailing investment sector, although if they put the money back into listed property they may have repurchased trouble.

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