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Listed Property Trusts - What's ahead?

LPTs offer investors a range of advantages. They are traded on ASX, managed by a professional fund manager and have delivered outstanding returns to investors. In this article we look at what are LPTs, how you can take advantage of the benefits they have to offer along with an explanation of recent trends within the LPT sector.

Australia still ‘punching above its weight'

Listed Property Trusts (LPTs) can provide you with a way to gain access to a portfolio of property in a cost effective manner, with the added benefit of having a professional manager making the investment decisions.

In fact, Listed Property Trusts (LPTs) have been so successful that Australia accounts for close to 12% of the value of property listed around the world, whilst our share of global equity markets is closer to just 2%.  This an example of the LPT sector ‘punching above it’s weight’.

At the end of the 2005 financial year, the sector provided returns of 17.9% and there were close to one million LPT investors in Australia. The number of LPTs continued to grow with a further 10 new listings during the year, increasing the market capitalisation of the sector to over $86billion - a growth in value of 32%.

So what has changed?
There has been a lot of discussion regarding LPTs over the last 12 months and many LPT investors may be hearing unfamiliar terms such as internal v external management, gearing levels and the ‘index has become more concentrated’.

Below is an overview of some of the trends and changes within the sector that are important to consider when making your LPT investment decisions.

Internal vs. External Management
One of the appealing features of choosing an LPT as an investment is that it comes with a professional manager. Not just one person, but a team that manages the day to day running of the properties, sourcing of tenants and ensuring rents are in line with expectations and collected on time. The manager also implements the investment strategy by choosing investments, and where appropriate, selling or refurbishing properties. The manager earns a fee for providing these services on behalf of their investors.

The relationship between the manager and the LPT can be managed internally or externally and sometimes the external management company may be stapled to the trust.  This is a significant trend that has emerged over the last 18 months. The obligations of each party and how each is rewarded should be considered when making investment decisions.

International and Domestic Assets
Finding suitable domestic investment grade assets to invest in has become a difficult task for many LPT managers so investing in assets in other countries is growing in appeal. There are a number of LPTs listed on ASX which have investments offshore. There are also offshore funds, with assets located overseas, which choose to list in Australia on ASX.

It is important to understand the potential impacts of investing in LPTs with exposure offshore as there may be risks associated with currency or borrowing costs.
 
Gearing
In order to assist in purchasing offshore investments, LPTs can borrow funds to meet the funding costs. Gearing can assist an LPT grow and meet its objectives; however you should understand what this means for you given your appetite for risk. The average level of gearing across Australian LPTs is approximately 35%. Is this too little, too much or just right?

The Property Index
An index provides a benchmark by which performance can be measured.  Currently there are 23 LPTs in the S&P/ASX 200 Listed Property Index with the 5 largest LPTs accounting for almost 65% of the index.

There are however a wide range of investment alternatives outside the index with strong yields and differing investment philosophies. It is important to consider the full range of LPTs when you are looking to make your investment decisions.

LPT Index Futures
The latest addition to the ASX range of futures contracts is the ASX Mini 200 Property Trusts futures contract.

The underlying index of this contract is the S&P/ASX 200 Property Trusts (GIC) Sector Index. The other features of this contract are the same as the features of the Mini 50 and Mini 200 contracts.

For more information on LPT Index Futures, please visit the ASX website.

© All rights reserved 2005. This material is educational and it is not intended to constitute financial advice.

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