Look before you leap into 'expensive' listed property.

Posted On Monday, 21 July 2003 02:00 Published by eProp Commercial Property News
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Over the past three or so years, listed property has come into its own as an asset class, and this has generated much media hype and interest among potential investors.

Simon PearseBut Simon Pearse, the managing director of The Income Specialists - which is a division of the Marriott Group - says the excitement over listed property should be tempered.

The lack of rental growth indicates that listed property is currently fully priced. While an income yield of 11.5 percent, with prospects of total
returns of between 12 and 14 percent over the next five years, is attractive to income-dependent investors in an environment of low-interest rates, investors are currently paying a premium for this investment, he says.

The returns from property come from two sources. You get a proportion of the income that is earned by the listed property entity (this is called a yield), and you share in the growth in the value of the units that are listed on the stock exchange (the capital appreciation). The total return
from listed property is the yield plus the capital appreciation.

"We believe that this asset class is currently expensive, having already built in the prospects for further interest rate cuts and a lower inflation
environment into its current price," Pearse says.

"Should further interest rate cuts not materialise, however, yields could move back up and investors would then be able to purchase a higher yield. There is no guarantee this will be the case, but then we didn't expect interest rates to move up steeply 18 months ago either," he says.

With listed property trading at a premium to net asset value, investors could do better by purchasing physical property, Pearse says.

Taking into account the current weak property fundamentals, income for the year ahead is expected to grow by between zero and one percent, and by between two and three percent over the next two years.

Total returns over the next five years are expected to be about 12 percent to 14 percent. This forecast is based on an income yield of 12 percent and an annual growth in income of between two to three percent.  Pearse encourages investors to take an objective look at property before investing in it.

Considering the anticipated lower inflation and interest rate environment, listed property remains suitable for income-dependent investors. However, investors should be aware that listed property is now more expensive than equivalent open market property, Pearse says.

Last modified on Monday, 12 May 2014 14:07

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