Listed property companies — buyer beware

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Listed property companies — buyer beware.

Commercial property assets have benefited from low interest rates, with the difference between property yields and the declining cost of funding helping to drive up asset values and the share prices of listed property vehicles. As with residential properties, valuations of listed property companies are backward looking. The reported net asset values (NTA) of listed property vehicles are typically assessed by independent valuations which are determined by reference to historic transactions of similar assets.

It is not uncommon during periods of strong investment markets for the share prices of listed property companies to trade at a premium to their NTA. In fact, ever since mid-2012 the share prices of listed property companies in NZ and Australia have been trading at premiums to their reported NTAs - with the NZ listed property sector currently trading at an average 14% premium to NTA and Australia a whopping 39% premium.

As investors in listed property companies (via our Property & Infrastructure Fund and some KiwiSaver Funds), we are wary of large Price/NTA premiums as there is little margin for safety in share prices should the property cycle turn down. At current premiums, companies are more likely to capitalise on their ability to raise capital relatively "cheaply" (e.g. raise equity at a discount to share prices but at a premium to NTA).

In recent weeks we've had two of our portfolio companies (Dexus Property and Kiwi Property Group) announce equity raisings to reduce their gearing, while two others (Goodman Property and DNZ Property) have reiterated their intentions to recycle (or sell) non-core assets instead. Given the large P/NTA premium for many companies, we wouldn't be surprised to see further capital raisings from the sector.

It is timely to remind investors that the ability of listed property companies to deliver shareholder value is as much to do with capital management as it is about managing their assets/portfolio (e.g. driving rental growth, maintaining occupancy, achieving diversification etc). The listed property sector both in NZ and overseas has historically had a poor track record of capital management, hence our preference for companies that opt to sell non-core assets into strength over those that use NTA premiums to raise more money.


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