New Zealand’s listed property trusts (LPTs) have become more active in managing their portfolios, according to Shane Solly, Harbour Asset Management director.
Solly said there had been a noticeable uptick in LPT activity in “acquiring and disposing of properties and in development or redevelopment projects”.
“Depending on the proportion [of the LPT] assets involved in these active components it can cause quite different outcomes for investors,” he said.
While most of the big LPTs have handed in solid results in the current reporting season to date (some report this week), Solly said investors needed to adopt a cautious approach to the sector.
He said the “big bad wolf” for LPT investors was the timing and quantum of expected US interest rate rises, which would have a knock-on effect for all yield plays.
But aside from the threat posed by rising interest rates, Solly said New Zealand LPT investors face other risks.
“The risks for investors in NZ listed property securities are that many are paying dividends based on accounting earnings rather than measures that adjust for maintenance capital expenditure and tenant incentives,” he said. “And that listed property securities change their risk profile to keep up with high capital market expectations.”
Solly said while Harbour has some exposure to all the major NZ LPTs (the newly-launched S&P/NZX includes seven of the 10 local listed property trusts), overall it was underweight the sector.
“Our view is that NZ listed property securities are fully-valued and we have a low exposure to them in our growth portfolios,” he said. “We think there are other opportunities that offer better growth and earnings potential for a lower level of risk.”
Despite the high valuations, Solly said the most recent reporting round reflected a “consistent, some would say boringly so” performance in the LPT sector.
“Most LPTs are continuing to deliver dividends, and there’s evidence to suggest they can keep doing that,” he said. “The underlying property fundamentals remain robust and supportive for returns.”
Solly said LPT returns also offer some tax effectiveness – particularly for those on higher marginal rates – that can boost overall yields.