Property trusts have outperformed shares this year. What has traditionally been seen as solid, plodding investments have exploded with huge investors pouring billions of dollars into the market. Giants such as Westfield, Mirvac and Bunnings have turned massive profits from investing in property trusts.

But economists are leery of raising the starter’s flag for an investment frenzy.

Morningstar senior equity analyst, Tony Sherlock, believes Australians and offshore investors have been attracted to the low interest rates and high income yields produced by property trusts. But he also says, “Their values have been bid up aggressively and many are trading at a substantial premium to their tangible assets.”

Image: www.theage.com.au

Image: www.theage.com.au

Because of this the short term outlook for property trusts is impossible to forecast. But one shouln’t be surprised to see some hiccups in the market.

“Over the next two to three years I think a lot will pull back further. Interest rates will edge up.”

A recent report by research group Lonsec suggested an increased risk in Australian real estate trusts. The report indicates the market has already taken on several defensive characteristics after what has been a recent super performance.

Tony Catt, Director of Catapult Wealth, believes property trusts are in much better shape than they were prior to the Global Financial Crisis. Then, borrowers were “borrowing heavily just to pay high distributions to investors and prop up share prices. When that unravelled with the GFC, they (property trusts) fell much harder than the overall share market and generally are still trading way below their peaks.

“A lot of people have long memories and have been very lukewarm about re-entering the property trust market,”

His advice is for investors to always check the dividends and distributions stemming from a company’s cash flow, not their debt.

Furthermore, he tells investors to be aware they more than likely are already exposed to the property market through investments made by their superannuation fund.

Property trusts have good and bad qualities.

On the good side: You have exposure to the property market without the need to directly buy and maintain one. Your investment is diversified into many different types of commercial properties, like office blocks, industrial properties and shopping centers. Annual rent increases match inflation. And distributions usually come with substantial tax benefits.

On the down side: You have no say in the day-to-day decisions made on or about any of the properties. The share price is extremely volatile as it is linked into the wider sharemarket. Historically property trusts take a lot longer to recover from down swings than shares. And the tax component is a lot trickier because of the dividends and franking used in trust distributions.

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