In 2007 market conditions created a huge bubble in property trusts. Now, the Sydney Herald reports, A-REITS (Australian Real Estate Investment Trusts) are creating another.
The interesting thing about this particular bubble, is that one of its beneficiaries, who happens to be the chief executive of a property trust, has decided to call time on it. No one seems to be listening.
In 2004, Intelligent Investor Share Advisor members received warnings that listed property trusts were highly overpriced. Property valuations were high and debt levels were higher still. Simple structures had given way to complexity, which was usually considered to be a warning sign.
Prices continued to rise until 2008. Real estate bubbles are usually easy to spot, but no one knows exactly when they will come to an end.
By that point, the smart money had moved on. The only people left in the market were those investors who were left holding worthless share certificates. The global financial crisis hit and the freezing of the credit markets crushed the sector. Many investors saw their portfolios crushed as well.
The casualty list was long and distinctive in Australia. It included General Property Trust, which had completed an ill-fated deal with Babcock & Brown, as well as Centro, which had been Australia’s best-performing property trust at one time. It effectively went broke after betting everything on a US expansion, which in hindsight was not the best option.
Paul Weightman, CEO of Cromwell Property Group, is seeing a different sort of bubble developing in the market in 2013. “We have an enormous amount of capital from offshore looking to find a home in the Australian market, but we have pretty poor underlying property fundamentals.”
He points to the fact that the S&P/ASX 300 A-REIT Accumulation Index has returned approximately 40 per cent over the past year alone and went on to say that, “if it plays out like 1988, you will see prices bid up to the wazoo and a complete flop in property values”.
Weightman feels that the best course of action is to sell assets before the bubble bursts. He sees value in searching for mid-tier assets where prices are more rational. He refers to these as the “ugly ducklings” of the market.
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