Property trust values rising: analysts

The Rialto Centre and neighbouring Carlton DFK Tower in Newmarket were sold for $49 million. Photo / Supplied

Unit and share prices of listed property trusts and companies have rallied strongly in the last three months.

Jeremy Simpson and Matthew Leach, analysts at Forsyth Barr Research, issued a 22-page report on the sector and found price gains of 15.5 per cent.

"There were solid gains across the sector with five of the eight listed property vehicles in the last three months delivering strong share price gains.

"Some of the more heavily discounted vehicles such as National Property Trust (up 20 per cent), Kermadec Property Fund (up 14.9 per cent) and ING Property Trust (up 11.6 per cent) all had very strong months in August," the analysts wrote.

All eight vehicles in the sector ranked favourably as either buy, hold or accumulate. None ranked as a stock to be sold.

Prices on vehicles with larger market capitalisations - AMP NZ Office Trust and Kiwi Income Property Trust - were up 5 per cent in the month "and were the major contributors to the strength in the property index".

"Assets sales and the general level of activity seem to be picking up slowly. The key features in August were large asset sales by National, Goodman Property Trust and further small sales by ING. We have also picked up anecdotal comments of increased leasing enquiry and activity.

"The sector has bounced strongly over the last four months on the back of a strong market and improved investor confidence. We still expect the sector to continue trading at a discount to our estimate of fair value. However, we believe the risks of a substantial further pull back in property values is largely factored into prices. With the strong share price move by Goodman over the last quarter, we have pulled back our recommendation from buy to accumulate. Our preferred vehicles are Kiwi, AMP, Property For Industry and Goodman," the analysts said.

The key feature of August for the sector was asset sales. National sold two adjoining Newmarket properties for $49 million, 6 per cent below March 31 book values. It sold Broadway's Rialto Centre and Carlton DFK Tower.

That has lowered National's gearing to around 25 per cent and reduced its exposure to the retail sector, the analysts said.

All the vehicles were exposed to increased pressure on property which is resulting in vacancies and rent changes. But most of the businesses have portfolios in sound shape.

"Where required they have been able to use asset sales to keep banking arrangements under control. We believe there has been increased confidence that the attractive dividends will hold up reasonably well," the analysts said.

Kermadec drew the least praise, with Simpson saying it was "trading at a large discount to our valuation and its asset backing. We prefer larger and less-geared vehicles in the current market".

An advantage to its small portfolio meant that gearing could be immediately improved by selling one property.

Kermadec listed in December 2006 and its manager - Augusta - holds a 14.2 per cent stake in the company which in 2007 held property assets valued at $107 million. Its portfolio has a 93 per cent occupancy. Forsyth Barr holds a 7.9 per cent stake and Tower Asset Management has 5.1 per cent.

Kiwi, one of the businesses Simpson favours, has all the hallmarks of a good investment.

"Kiwi has relatively defensive cashflows and it remains one of our preferred vehicles with its focus on tightly held prime retail and office assets and its long-term bank facilities.

"The listed property sector is factoring in a further downturn in the direct market with Kiwi's unit price implying a further 13 per cent fall in portfolio values.

"Sylvia Park has been a successful development and Kiwi's prime CBD office portfolio is relatively sound given its very low vacancy and the modest new supply outlook; however, general vacancy and rent review risks in the Auckland CBD continue to build," Simpson said.

AMP's unit price implies a further 10 per cent fall in property values.

But the business has a sound balance sheet and gearing has dropped to 18.9 per cent, 20.5 per cent under the trust's banking covenant calculations, as a result of its $201 million capital raising.

Goodman has been the subject of improving investor sentiment mainly due to sound management of its large industrial and suburban office portfolio and the way it has managed its loans and liquidity, Simpson said.

Goodman has high-quality properties, a favourable management structure and attractive yields. It is one of the few vehicles in the sector trading close to Forsyth Barr's valuations, Simpson said.

Property For Industry has a record of reliable performance and increasing value through property management.

"It has gearing below the sector average and has no pressing bank rollover issues.

"Its portfolio is diversified across major industrial precincts in Auckland and Wellington.

"PFI has defensive qualities and is low-risk from a lease expiry perspective," Simpson wrote.