Box A: Australian Listed Property Trusts
As an actively traded investment class, listed property trusts (LPTs) provide an indication of
conditions in the commercial property market. Available evidence suggests Australian LPTs own
around one third of domestic commercial property, with ownership of the remainder divided
reasonably evenly between unlisted property trusts and institutional investors. Australian LPTs
also invest in commercial property overseas, with around one quarter of their assets located in
the United States and a further 10 per cent in other countries, mainly in Europe.
LPTs have traditionally been
considered a relatively defensive
investment that provide stable
dividend income. Over the period
from 2000 to 2007, the average
annual return on LPTs was 14 per
cent, which was similar to, although
less volatile than, the average return
for the broader equity market
(Graph A1). This strong performance
was underpinned by robust growth
in domestic commercial property
prices, with office, retail and
industrial property prices increasing
at average annual rates of around
7 to 10 per cent over this period
(Graph A2).
One factor supporting prices
over recent years has been the strong
growth in economic activity. This
is particularly evident in demand
for office space, with the national
vacancy rate having fallen sharply
in recent years to just over 4 per
cent, around its historical low, and
office rents increasing at an average
annual rate of 8 per cent since
2000. Another factor has been the
favourable financial environment,
and in particular the global search
for yield which saw a fall in risk
Graph A1
Accumulation Indices
End December 1999 = 100
Index
Index
LPTs
300
300
200
200
ASX200
100
0
100
l
l
2000
l
l
2002
l
2004
l
l
l
2008
2006
0
Sources: Bloomberg; Thomson Reuters
Graph A2
Commercial Property
March 1995 = 100
Index
Office
Industrial
Retail
Index
250
250
Prices
200
200
Rent
150
150
100
100
50
1990 1996 2002 2008
1996 2002 2008
50
1996 2002 2008
Sources: Jones Lang LaSalle; RBA
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premia demanded by investors and low interest rates around the world. Moreover, credit was
readily available to the commercial property sector.
As with many investors around the globe, domestic LPT managers responded to the
favourable macroeconomic and financial conditions over recent years by increasing leverage.
Reflecting this, the average debt-to-equity ratio on LPTs has increased, rising from around
50 per cent in 2000 to around 70 per cent currently. Available data suggest that around
half of LPT debt is sourced from capital markets, with the remainder from Australian and
foreign banks.
Graph A3
Listed Property Trusts’ Share Prices
31 December 2000 = 100
Index
Index
Industrial
250
250
Diversified
200
200
150
150
Retail
Office
100
100
50
50
2002
2004
2006
2008
Sources: Bloomberg; RBA
Graph A4
Listed Property Trusts’ Gearing and Prices
Share price change since end October 2007
%
%
n n
n
-20
n
n
n
-20
n
-40
-40
n
nn
n
n
n
-60
n
n
-60
n
-80
-80
nn
n
n
-100
0
20
40
60
80
100 120 140 160
Debt-to-equity ratio as at December 2007
Sources: RBA; Thomson Reuters; company accounts
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-100
180
The recent turmoil in global
markets has seen significant declines
in the share prices of many highly
leveraged entities, including LPTs.
Moreover, some LPTs that relied on
short-term funding have experienced
difficulties rolling over debt, and
access to commercial paper markets,
particularly in the United States, has
also been limited. In response, some
LPTs have cut dividends and have
sought to lower gearing through
asset sales and by increasing equity,
either by introducing a dividend
reinvestment plan or seeking
additional capital. Since November
2007, LPTs have underperformed
the broader equity market, with the
LPT index falling by 36 per cent,
compared with a 25 per cent decline
in the ASX 200. The decline has
been largest for LPTs investing in the
industrial and diversified sectors and
for the most heavily geared LPTs
(Graph A3). For example, the share
prices of the 5 most heavily geared
LPTs have fallen by an average of
around 70 per cent since end October
2007 (Graph A4).
The falls in LPTs’ share prices
have also reflected downward
revisions to expected earnings, with
rental income growth forecast to slow and rental yields expected to rise as risk is repriced.
Concerns about exposure to markets with deteriorating economic outlooks, such as the United
States and United Kingdom, have also weighed on some LPTs. R
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