LPTs will also start changing their models. Most LPTs have suffered a battering since Centro went into a trading halt in December. But the ones that suffered the most have four things in common: significant funds management exposure, high levels of gearing, large refinancing pending and lower-quality foreign assets.
Historically, LPTs were favoured for their defensive characteristics, not their growth prospects, but all that changed as they expanded overseas and pushed up gearing.
A year ago the yield on LPTs fell below government bond yields for the first time in a decade. As interest rates started rising, this pushed the yields further down.
Post Centro, the world has changed. LPT yields are at record highs due to their record low share prices. Analysts, auditors and investment bankers will now start discounting the valuation they place on growth businesses and put a premium on income streams.
This will ultimately change the models of LPTs. But the impending consolidation will no doubt kick-start the re-rating of a few stocks as the strong, such as Stockland Trust and Westfield Group (rank 22), pick over the weak.
Australian trusts that own Japanese property are particularly vulnerable to takeover or merger. Australian trusts that fall into this category include Babcock & Brown Japan, Rubicon Japan Trust and Challenger Kendix Japan Trust. These have the worst cost of capital of any LPTs and are trading on huge yields.
These Japanese LPTs have performed poorly mainly due to the perception that they are not adequately hedged against foreign exchange movements between the Australian dollar and the Yen.
The problems facing the sector are best summed up by Justin Blaess, director of ING’s listed property and infrastructure: “Centro epitomises the sins of the LPT sector coming home to roost.” ?Blaess says aggressive expansion, questionable real estate assets, high gearing, opaque accounting such as adopting equity accounting instead of consolidating risks, and expanding headlong into property development are just some of the sins the LPTs have been committing in the past few years.
He could be saying the same about infrastructure.
The reality is Australia has developed real global expertise in managing property and infrastructure assets. Now that expertise needs to be put into models that are more reflective of the times.
Adele Ferguson is a Business Journalist at The Australian.
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