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Technically Speaking: Merger won't help property firms

Friday 17th November 2000

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1. AMP Office

2. Australian growth

3. BT Office

4. Centro Property

5. General Property

6. Stockland

7. Westfield Holdings

The merger between the Australian Stock Exchange and the New Zealand stock Exchange will open up more listed industrial sectors for local investors. One example is the commercial property sector.

Modern portfolio theory recommends an asset mixture of cash, fixed interest, commercial property and shares. The Australian sharemarket is well served by an extensive range of listed property trusts.

Our own commercial property listings have fared poorly on the NZSE overall. Part of the problem lies in there being so many listings for a small sharemarket that they cannibalise support from each other. The problem has been partly addressed by a round of mergers and takeovers that have thinned out the competition.

The other main problem lies with a tendency to keep going back to shareholders for more money. Some of our property listings have a reputation for giving with the one hand (dividends) while taking with the other (rights issues). Investors find it hard to get ahead with capital-hungry property firms.

Australia has a lot of listed property trusts but a much larger sharemarket to absorb interest across all of them without excessive competition for investor funds driving down prices. Property listed on the ASX tends to sell at a premium above asset backing, whereas property on the NZSE usually goes for a discount.

The Australian economy is tipped to turn down next year, which could start to squeeze property trusts.

Growth in property trust unit value stems from a combination of increased rental income and capital gain on real estate. In a slackening economy, capital gain on property would normally slow down and might even reverse.

Rental income can be vulnerable as well. It can be harder to find new or replacement tenants in a weaker economy. Existing tenants might not renew or might seek flat or lower rents. Rent reviews may not achieve higher income levels. Usually rent on shopping malls includes a percentage of turnover, which can drop in a downturn.

Investors will be cautious of the risk of lower property trust unit prices ahead. The charts show a sampling of various ASX-listed property trusts, most of which seem to be holding up above their 40-week averages for the meantime.

At least some of the property trusts are in an aggressive mood despite a poorer general outlook. Westfield Holdings (chart 7) is the parent of Westfield New Zealand, formerly St Lukes Group. Its local subsidiary is spending tens of millions on upgrading malls in the Auckland region. Its most ambitious plan is for the St Lukes complex itself, which is planned to copy the international pattern of combining shopping with entertainment such as multiscreen cinemas.

It is possible to track Australian property trusts locally through the NZSE-listed Property Leaders series of passive trusts. For some reason these trusts have not proven much of a hit with investors, with low turnover suggesting lack of interest.

A transtasman sharemarket merger should see more local investor attention directed at opportunities over the ditch, which could detract further from the performance of local property listings unless there is increased reciprocal interest from the Australians.

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