Research: Explaining the fall of listed property
Monday, June 26th 2000, 12:00AM
At the beginning of May 1998, most established listed property companies were at a share price peak, falling to troughs mid to late 1998. Reasonable growth performance across all listed property sectors occurred between mid/late 1998 generally, rising again to peak in early 1999.
The 12 months to late April 2000 has, however, generally been a period of constant share price decline. Ernst & Young research shows average downward share price movement for the listed stocks of approximately 24% during this period.
By way of comparison, the NZSE40 declined by approximately 11% over the same 12 month period, and the NZ Property Council composite index showed capital value decline of approximately 4% during the year to December 1999, which is the nearest corresponding period.
Overall, average share price performance of the listed property stocks was 13% less than the NZSE40 performance over the same period, and 20% less than the capital value composite index of the Property Council, for the closest corresponding period.
1999 Annual Performance
It has been clear for a long time that the performance of listed property stocks does not always follow commercial property market performance, the performance of the stock market itself or surprisingly, even the actual performance of the portfolio in which the shares are owned.
In demonstrating that the performance of the Listed property sector does not follow the non listed market, the NZ Property Council, CBD Office Index shows slight capital decline of 5.4% during in the year to December 1999 but the office stock based listed companies experienced significant decline over the same period. Share price decline for AMP Office Trust and Capital Properties approximated 11% and 38% respectively.
A second example is St Lukes Group which has experienced share price decline of approximately 12% during the year to December 1999. However under Westfield management, actual performance has generally been good with rental growth being consistently achieved. The Property Council of New Zealand retail index also shows a good retail property sector with capital value increase of close to 5% during the same period.
There seems to be no obviously identifiable reason for listed sector performance below that of the non-listed, non-securitised property market. The old excuse of not enough critical mass will not stand up any longer. This is shown by falls of 25% in St Lukes Group, 14% for AMP Office Trust and 15% for Kiwi Income Property Trust during the past year. These are three of New Zealand's largest listed property portfolios. Also, the Capital Properties buy-out of Shortland Properties (undertaken to add critical mass, effectively doubling the portfolio size) in mid 1999 only caused further share price decline. The result of this share price decline is now evident with most listed property companies trading significantly below asset backing as at 28 April 2000.
Some of the reasons these shares are trading well below asset backing include:
- portfolio valuation levels which are recognised by the investors as being unrealistically optimistic;
- high-fixed costs of operating a publicly listed property company leading to low or no dividend policies and subsequent low demand for shares;
- limited available investor funds for New Zealand listed property due to increasing investment options and the typical offshore investors, current view of New Zealand as a long-term investment proposition.
One company not to follow the downward trend of the listed property sector is Property For Industry. They continue to perform well, notwithstanding their small size relative to AMP, Kiwi Income Property Trust and St Lukes Group; and their single market focused approach to property investment. PFI performance has been good for various reasons, including, the ongoing consistent performance of the industrial/manufacturing sector and property market, dividend policies which entice investors to stick with this property stock, reductions in operating expenses and weighted average remaining lease terms which are far longer than those of the other stocks.
Little wonder PFI recently won the 1999 Listed Property Company category of the New Zealand Property Council Awards. However, it is interesting that a company which still traded at an average of 5% below NTA was able to win the award with few close rivals. Overall, the competition traded far lower with the market average around 17% below NTA over 1999.
It seems that the challenge still remains for all listed property companies to achieve premiums for their shareholders rather than discounts.
Brent McGregor is a Senior Manager in Ernst and Young's Auckland Real Estate Group.
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