LPTs only for the brave

David Potts | July 30 2008 | The Sydney Morning Herald & The Age (subscribe)

It would take a brave person to invest in listed property trusts (LPTs), especially one where the price has halved since its peak, but then I've always said cowardice has its place.

Especially when it's Stockland which, by LPT standards, has a relatively low level of debt with gearing of about 30 per cent.

Even so, it's made no secret of the fact that it has put up a lot of properties for grabs, fuelling speculation that its earnings outlook might not be so great, prompting some analysts to be tipping downgrades or, more intriguingly, it's building up a warchest.

After all, with LPT prices marked down below their underlying values - if, that is, you can take these seriously which is another question - there must be some very enticing opportunities for industry consolidation.

Don't forget Stockland has already had one tilt at GPT which the market seems to think is in a right mess.

Certainly property trusts face the problem of high interest rates, a crunch in asset values offshore where they've all invested in varying degrees which has been compounded by the stronger dollar, and the impact of slowing economic growth in Europe and the US on commercial rents.

While Stockland has a lesser problem with all of these compared with its property peers, its shortcoming is its residential pipeline in Australia - it has the largest land bank of the LPTs - where you will have noticed the housing market is weak.

Considering the acute shortage of homes and the increasing demand from immigration, that should only be a short-term problem.

Besides, two-thirds of its earnings come from the traditional LPT staples of shopping malls, commercial properties and retirement villages in Australia and are considered low risk because of their quality and the diversity of the portfolio.

Then again, while they're great assets for generating income, the potential capital growth is nothing to write, er, home about.

The real expansion will come from residential developments (eventually), the demand for retirement accommodation from an ageing population and property development in Britain.

You're right, none of that's going to happen quickly.

Of the nine analysts with a recommendation on the stock, only three say it's a buy. Most are sitting on the fence calling it a hold, and two a sell.

The highest broker valuation is $6.16 a unit.

Advantages

Cheaper price

Rates peaked

Opportunities

Low debt

Disadvantages

Strong dollar

Write-downs

Distribution cut likely