Daily ShareChat: Listed Property Sector

By Jenny Ruth

Friday 29th May 2009

Increased vacancies and falling rents are likely to hurt the listed property sector which is already cutting distributions, say ABN Amro Craigs analysts Rob Foster and Daniel Reynolds.

"The present property market clearly favours tenants and we believe those REITs (real estate investment trusts) most willing to provide incentives to ensure tenancies remain in place will ourperform peers," they say.

They see the greatest risk in the CBD office market, citing recent increases in the amount of sub-let space and the number of tenancies coming up for renewal.

"Coming off all-time lows, sector vacancy has remained resilient into the current recession," but market fundamentals indicate an upward correction is imminent, the analysts say.

In particular, vacancy rates correlate strongly with the unemployment rate, lagging it by about 12 to 18 months. New Zealand's unemployment rate rose from 3.3% in the third quarter of 2007 to 5.1% in the March quarter this year and is likely to peak at about 6.8% in the March quarter next year which will be the country's highest rate since 1999.

The analysts don't expect vacancy rates to reach the 12% level seen in 1999. "Scarcity and increased cost of development finance and a more cautious investor attitude towards new development should limit the supply of new space into the market, further mitigating upward pressure on vacancy."

ABN Amro Craigs investment view on the listed property sector is NEUTRAL, with Goodman Property Trust (NZX: GMT ) their preferred sector pick.

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