Strong gains were experienced over the quarter on renewed investor confidence, partly buoyed by the improvement in economic conditions and partly by the reopening of debt markets in the sector (Westfield completed a US$2 billion debt issue in August ; ING Industrial refinanced a $1.63billion facility with a banking syndicate; and Macquarie Countrywide issued $265million of commercial mortgage backed securities). The reopening of debt markets obviates the need to raise capital by dilutive capital raisings at discounts to market value and so marks a critical turning point for the sector.

Fundamentally, the large amount of capital raisings to reduce debt over the last 18-24 months has dramatically improved balance sheets in many instances. Further, the move back to basis where property trusts generate passive rental income has also helped to reduce the risks attached to operating income.  Nevertheless there is still a number of trusts with look-through gearing levels that remain relatively high. These trusts may need to raise more capital and/or sell assets before we reconsider those as potential investments. While further falls in asset prices in overseas markets cannot be ruled out, we believe that asset prices in the Australian market may start to stabilise as the economic situation improves.

Conclusion

We believe selective value remains in the A-REIT sector as some trusts that have deleveraged sufficiently remain at attractive discounts to their purported net asset value. As commercial property prices stabilize, the potential for further gains in the sector are likely.