Listed Property Trusts’ future after Centro

The collapse in Centro’s share price shows a lack of investor confidence that threatens other listed property trusts with US interests.

Listed property trusts are suddenly in deep trouble, all of them. With a 76% plunge in the share price of sector leader Centro yesterday, the contagion risk in this sector is intense.

In common with the recent shock decline of home lender Rams, the share price of the Centro group has been decimated due to fears the US credit crisis will make it impossible for the group to trade profitably.

For listed property trust (LPT) investors, the ferocity of the sell-off in Centro offers three pointers:

1. US-centric, highly geared LPTs have temporarily lost the confidence of investors. This is bad news for a string of LPTs including the Goodman group, Macquarie Countrywide, Mirvac Industrial, Rubicon, Tishman Speyer and more.
2. Locally focused LPTs with little or no US exposure – Bunnings Warehouse Trust, Commonwealth Office and Westpac Office – should ultimately be immune from the spreading crisis.
3. Cashed up property trusts – especially Westfield – could emerge in a strengthened position.

Concerns over the financial viability of some LPTs has stripped 3.5 % off the ASX in the first session of the last full trading week of 2007.

What’s happening at Centro? Lumbered with $2.5 billion in short-term borrowings just as the US commercial mortgage market virtually closed, Centro managing director Andrew Scott had been hoping the company’s strong relationships with a number of banks would enable it to raise the money and trade on. But those “friendly” banks did not help Centro in its hour of need.

For several of Australia’s best-known LPTs, the US commercial mortgage market has been an easy source of funds for a vast range of property deals. The US credit markets will not be closed forever, but when they reopen interest margins will be higher, which will lower the value of properties.

Assuming long-term US rates stay low, the ultimate effect of this crisis might be marginal. But if Centro is forced to sell its US properties on the open market when a debt deadline hits on 15 February, and if there is effectively no US mortgage market operating, then there will be a substantial fall in the sale prices. Many Australian unit holders will be savaged.

Seasoned investors in Australian stocks will be disappointed the Centro management has allowed the group to be so heavily exposed to one market at one time. It is surprising, given the breadth of experience on the Centro board: directors include Brian Healey (the last chief executive of Nicholas Kiwi); Sam Kavourakis, ex National Mutual; Peter Wilkinson, ex-Coles Myer; and Jim Hall, ex-BHP.

Worse still, the irony for local investors is that if the sub-prime crisis had hit the Australian banking system rather than the LPT sector, the sell-off might have been softened by the implicit commitment of the Government to bail out troubled banks.

Instead Centro – and other investors in US-centric, highly geared LPTs – are going to be left holding greatly discounted stock.

Still, there is no need to panic about LPTs. Unlike, say, a banking crisis, the LPT sector is underpinned by real assets and strong income; Centro has solid assets (regional US shopping centres) and good income levels. This must eventually allow value to be revealed in the depths of any crisis.

LPTs that have low gearing or stayed onshore – Bunnings Warehouse Trust, Commonwealth Office, Westpac Office Trust – should survive with little drama.

The best – and Westfield leads the pack here, even though it has an indifferent year, it fell only 5% yesterday – will exploit the situation.

This story first appeared in The Eureka Report.