Safe as houses but bargains hard to find

Rental growth will slow and capitalisation rates and asset values become more stable in the listed property sector, an analyst forecasts.

Mark Lister, of ABN Amro Craigs, said he was generally optimistic about the property market's underlying fundamentals in the coming year but was predicting a slight change.

"We expect growth in asset values to slow down, although the weight of capital globally that is destined for low-risk assets is likely to keep prices supported at current levels," he said.

"We do not expect to see steep increases in net tangible assets and revaluations that we have over the last few reporting periods, although in particular Kiwi Income Property Trust and ING Property Trust are likely to report strong gains, with their valuations looking particularly dated."

He is picking a 10 per cent total return from the sector, with the majority coming from dividends, not unit or share price rises.

The sector could take further heart from a Treasury forecast which said that by 2010, the NZ Super Fund would have invested $2.4 billion in property - a significant portion of it domestically.

Lister ranked the sector by total returns and found Calan Healthcare Properties Trust the standout performer.

"Arguably it came off the lowest base, with a significant number of non-yielding asset sales which led to the market re-rating Calan," he said of the trust, whose management has been sold to ING.

He also predicted that ING would eventually merge Calan into its existing property trust.

Second-best performer was Property For Industry which Lister said reflected the excellent fortunes of the industrial sector in which it specialised.

The company had a "brilliant" track record, organic growth opportunities and a low risk profile.

"However as with most quality companies, PFI is expensive. Its current yield is below the sector average at 6.4 per cent and it trades at a 13.9 per cent premium to NTA, although it has historically always traded at a premium of around 10 per cent. At $1.31, PFI is well above our valuation of $1.16 and as much as we like the stock, it is difficult to justify at these levels."

Lister said Macquarie Goodman Property Trust provided a cheaper exposure to the industrial market but its portfolio was still dominated by office assets, in spite of its industrial tag.

Ground leases and rental guarantees attracted a higher-risk profile too.

ING appeared to be one of the only value opportunities in the sector.

"We regard ING's office and retail portfolio as lower quality than other listed property trusts such as Kiwi and AMP Property Trust, so in a slowing economy, ING's tenants will run into trouble first and with demand likely to fall away earlier it does deserve a slightly higher risk profile," Lister said.

AMP was an attractive stock for investors who are non-taxpayers because of its low imputation of dividends. It had an element of under-renting in its portfolio so there was potential for some upside for rental growth over the coming years.

National Property Trust is the only stock Lister recommends selling, citing asset value writedowns, high gearing, dividend cuts and badly managed developments which had all plagued the trust.