Listed property 'no longer a bargain'

The listed property sector is no longer cheap buying.

Forsyth Barr Research analyst Jeremy Simpson says unit and share prices in all eight NZX-listed entities are still trading at discounts to asset backing.

But the risks of further property-value drops had been factored into share and unit prices, he found.

"While still trading at a discount, the sector is no longer a bargain from a valuation perspective but continues to offer very attractive yields," he said.

Behemoths of the sector - Kiwi Income Property Trust, AMP NZ Office Trust and Goodman Property Trust - are his preferred stocks.

Last month, most of the listed property vehicles reported first half-year results "typically well down on the previous corresponding period in terms of distributable profit per share and dividend per share, but close to expectations".

"Drivers for the decline were dilution from new equity issues, higher interest costs and current tax for many, and for some, a lower level of dividend payout.

"The standout performers were ING Property Trust and Property For Industry with gains of 4 per cent and 2.4 per cent in terms of distributable profit per share. PFI was the only listed property vehicle to hold dividend levels on the previous corresponding period."

With the exception of ING, which was ahead of forecasts and the only one to get an earnings upgrade, all vehicles were close to expectations and full-year 2010 dividend guidance was maintained by all.

"Interim revaluations were undertaken by Kiwi, -3.5 per cent; Goodman, -1.5 per cent and National Property Trust, -2.2 per cent. AMP and PFI were only quarterly results so no revaluation was undertaken and both ING Property Trust and Kermadec Property Fund decided, based on market evidence, that the overall portfolio valuation impact was immaterial during the period.

"As expected, valuations were more heavily impacted by market rental levels than cap rate changes and Auckland office was the weakest property sub-sector.

"The CBD office market, in particular in Auckland, continues to attract increasingly levels of negative sentiment given increasing supply and the lagged impact on space requirements from a weak employment market. Both these will continue to drive down market rental levels over the next 12 to 24 months. Major vehicles exposed to CBD office are AMP and Kiwi.

"Both have substantial negativity already captured in unit prices, in particular AMP, given the respective discounts to net tangible asset backing.

"While the falling level of market rents remains the key risk for the sector's distribution levels, we expect the vehicles to generally be able to continue to pay an attractive dividend level through the cycle, albeit at lower levels than 2008 and 2009," Simpson wrote.

Zoltan Moricz of CB Richard Ellis has noted how the fortunes of Auckland's office sector were closely linked to employment growth.

"You don't need more office space if you don't have more workers. No, or low, employment growth in combination with increased office space capacity means that office absorption will be slower to recover than industrial and retail," he said in the latest Auckland real estate sector outlook published last month.