REITs: Australian LPTs, A Market that’s Too Mature for Its Own...

REITs: Australian LPTs, A Market that’s Too Mature for Its Own Good

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Australia has one of the oldest established REITs frameworks in the world, dating from the early 1970s. In Australia they are known as LPTs (Listed Property Trusts). LPTs come in two forms, firstly, the pure real estate portfolio investments and, secondly, so-called ‘stapled securities’ which would in this instance tie up the direct property investments with investment in a fund manager and/or a property development company. Stapled securities could be seen as an attempt to overcome the country’s relative shortage of potential real estate investments (see below) by diluting the pure real estate LPTs portfolios. The most distinctive feature of Australian LPTs is the investor’s ability to postpone paying tax on part of the income stream from their LPT investment.

Typically, the untaxed element of the dividend would be applied to the capital gains tax calculation with the effect of creating a notional (lower) LPT purchase price so that the CGT bill is higher when the investor comes to sell their LPT. It seems that the flexibility in terms of target investments and in paying tax on one’s investment adds up to a more versatile type of investment instrument than the new regimes in Germany and the UK allow for. As in other countries, Australian LPTs are required to distribute to all of their income.

At about A$110bn, Australia has the world’s second largest listed property sector. LPTs are a favourite with the country’s mature, well-run superannuation industry as they have defensive characteristics and obvious attractions in terms of income generation (read pdf report here). It seems that the potential rewards for investors in the LPT sector may be on the wane, heralding a change in Australia’s property investment environment. One factor in play here is the very high levels of securitisation in the sector; institutional investors own 38% of industrial real estate, 68% of commercial and 90% of shopping centres – the country is running out of potential property investments(read pdf report here).

Comparing the growth in the volume of investable funds at the disposal of the pensions industry (12.5%) in the next decade with the likely growth in the country’s non-residential real estate stock (5 to 7%) suggests a increasing dearth of investment grade property to invest in. There are a number of likely consequences to this outlook.

Firstly, LPTs will become increasingly interested in overseas property although this runs the risks of asset bubbles bursting in favoured markets and adverse exchange movements and, in any case, not all overseas markets will offer benevolent tax treatment to such investments. Secondly, there may be more investment interest in Australia’s vastly larger residential sector and, thirdly, related to this, there is likely to be growing interest in mortgage backed securities. Given the current problems relating to collateralised debt in the US, this also seems a risky direction to take.

There is one further trend in the Australian institutional property investment scene which stems from general investment conditions in recent years, the growth of ‘wholesale’ property trusts, an Australian manifestation of private equity. Whether this trend will survive worldwide interest rate rises, remains to be seen. Experts have ascribed the popularity of wholesale property funds (especially with pension funds) to the dilution of the traditional LPTs through stapling.

All of this would seem to suggest that Australian LPTs are really the preserve of big finance rather than the small investor. In these circumstances LPTs look like an investment for the risk averse rather than the bold. At a time of uncertainty for property in many markets, Australia seems a relatively safe real estate market. Given the importance of the pensions industry to the property market with its focus on rental yields, it seems unlikely that the sector is going to succumb to asset price inflation.

The industry is very well tracked by Investordaily with particular attention to foreign markets. Given the good track record of LPTs in the last 35 years, foreign (ie non-Australian) asset LPTs may prove to be one of the sagest routes into international property investment, despite the problems outlined above.