Aussie property downturn has 'silver lining'

Posted On Tuesday, 18 March 2008 02:00 Published by
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The fallout from the US sub-prime crisis may have tipped the Australian property market into recession but canny investors can make money, a property funds manager says

Real Estate Capital Partners (ReCap) chief executive Andrew Saunders said the full impact from the global credit crunch was yet to unfold.

However, when investment markets started to recover, investors in traditional rental model investments in high-growth markets would be the first to come back, he said.

"We are in a property recession, and while not a depression yet, that will come if the economy goes into recession," Mr Saunders said.

Mr Saunders pointed to the sharp decline in the ASX property index, combined with a 20 per cent volatility level for a sector that normally traded on three to five per cent volatility.

He said this indicated a significant adjustment in property values.

"The first impact of the credit crunch on Australian markets is that the cost of funding has risen, which puts pressure on investors," Mr Saunders said.

"This is evident in the increasing number of advertisements appearing in commercial property pages in major markets."

Investors previously looked to property as a conservative, predictable and understandable investment, delivering consistent annual returns of about eight per cent.

Mr Saunders said there was a silver lining to the gloomy outlook that should be viewed in the context of the current strength in corporate profits, cashed-up investors ready to re-enter the market and continuing growth of superannuation.

"Combined with what we perceive to be lenders' desire to work out asset issues, and whilst asset values will adjust, quality assets will not adjust by the levels we have seen in the listed market," Mr Saunders said.

"Selected buying opportunities will emerge due to the credit crunch.

"If investors can get it right, this presents one of the best opportunities we have seen for many years to secure good-quality assets at a reasonable level of investment."

Mr Saunders said the investment cycle had morphed from the traditional property cycle of seven years to one focused over 17 years.

He said the Australian property market behaved differently to others.

"The property market in Australia has turnover of about $10 billion a year whereas the US market turns that over in a week," Mr Saunders said.

He said the US sub-prime crisis had severely affected global markets, and that the liquidity crisis was well advanced and had led to a credit crunch.

"The unknown impact will be the depth of price adjustment for direct property assets," Mr Saunders said.

"A sharp decline in the ASX property index, combined with a 20 per cent volatility level for a sector that normally trade on three to five per cent volatility, indicates a significant adjustment in property values," Mr Saunders said.

ReCap executive director funds management Paul Nielsen said that while the credit crunch was making it increasingly difficult to raise capital, there were still opportunities for listed property trusts (LPTs).

"Trusts with strong balance sheets and solid investor support are best positioned to take advantage of the changes in property markets," Mr Nielson said.

"For investors, there is the opportunity to capture enhanced yield because the share price on many LPTs has dropped as a result of (changed) sentiment, but the income stream has not changed."

Publisher: Sydney Morning Herald
Source: aap

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