New look at listed property trust sector required

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Goldman Sachs JB Were says changes to tax rules require a new look at the listed property trust sector.

Thursday, June 14th 2007, 7:40AM

It notes that the market has recognised the introduction of the new PIE tax regime as having effectively transferred value from the NZ government (tax revenue) to listed property trusts through a lower tax liability on income streams earned.

The result being that investors get a higher net yield.

GSJBW also suggests the recent volatility in the sector indicates that the market has not settled on what the exact valuation impact has been.

It maintains that the best valuation method still remains discounted cash flow.

Volatility has been supported by the change in the top PIE marginal tax rate (to 30% from 33%) and the significant rise in bond yields.

In its recent review of the sector it increased valuations increased across all relevant companies due to the impact of the PIE regime and lowering of the corporate tax rate.

However, much of this has been eroded by the 10 year bond yield (around 100 basis points) since immediately before the PIE announcement in mid December.

GSJBW favours trusts with development prospects in their existing portfolio as they have an opportunity to promote material unitholder value creation.

It notes that in pre-PIE days opportunities were likely acquired with higher hurdle rates than current levels.

“Those LPVs with existing and significant development opportunities likely warrant a premium to our base case.”

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