Listed property trusts have been spectacular performers for investors.
Over the past five years the S&P/ASX300 property trust accumulation index has delivered 14.1 per cent. Last year alone investors enjoyed a 17.2 per cent total return.
If you had invested $1000 in the index three years ago it would be worth $1515 today so while the general sharemarket has also grown strongly property trusts have streaked ahead.
But there are rumblings about how sustainable this is. After any market sector has had a strong performance run it is sensible to question how likely that is to be repeated. But for the listed property trust sector the questions are being raised more as a result of restructuring occurring with major players, Westfield and Lend Lease/General Property Trust in particular.
The types of questions being raised are whether these mergers fundamentally change the underlying traits that have made property trusts successful.
Will they still pay the same sort of income? Has the risk profile of the sector changed because the mergers add property development activities to the mix? Is the nature of listed property trusts going to change to be more like ordinary industrial shares?
For thousands of investors and in particular retirees the answers to these questions are critical.
The Westfield merger has been approved and the new stapled securities to be known as the Westfield Group will begin trading normally tomorrow.
The Lend Lease proposal to merge with General Property Trust is still being considered, with the GPT board saying it expects to give unit holders its response to Lend Lease's proposal by the end of the month.
So what changes with Westfield's merger? It is true that the number of companies in the S&P/ASX200 property index has dropped from 39 in June 1998 to 26 today so that will make it harder for active managers to outperform the index because of a reduced number of opportunities.
However, while the number of players has dropped the size of the LPT sector has dramatically increased.
Importantly for investors the underlying assets in the sector which include some of Australia's prime properties do not change and their tenants will keep paying rents.
Research by UBS shows that, in 2000, 96 per cent of the sector's earnings came from rental income. After the Westfield merger, UBS estimates, rental income will still account for 90 per cent of earnings.
Most trusts already have the flexibility to invest some portion of the portfolio into other activities so the mergers do not add much, if any, extra risk and there may be benefits from the vertical integration of the groups.
One of the key measures of risk volatility has almost halved for the LPT sector in the past five years, from 13.3 per cent to 7 per cent and that has happened during an intense period of mergers and acquisitions among property managers.
Will the listed property trusts begin to behave more like mainstream company shares in the S&P/ASX200 index? The difference between the property sector and the broader market will narrow a little but not enough to be significant, correlation analysis shows.
What investors have enjoyed over the past five years is an income investment that has also delivered good capital growth. The level of capital growth should not be expected to continue that would be asking a bit much and LPTs will be affected if interest rates rise.
Robin Bowerman is head of retail at fund manager Vanguard Investments Australia. He can be contacted on robin.bowerman@vanguard.com.au.
