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Income still attractive

The Sydney Morning Herald
Income still attractive - Australia - property

Domestic investors are still wary of Australian-listed property. Despite the sector gaining more than 20 per cent over the past year, making it the best-performing sector of the Australian sharemarket, domestic investors are not buying into the recovery. Many are still haunted by memories of the sector's spectacular blow-up during the depths of the global financial crisis.

During 2008, the S&P/ASX200 A-REITs (Australian real estate investment trusts) index fell 54 per cent compared with a fall by the wider sharemarket of 38 per cent. The reason for the bigger hit to listed property was that many trusts had high gearing levels and complex corporate structures. During the 10 years prior to the crisis, many trusts changed from collecting rents from the buildings they owned into riskier activities such as property development. Those running the trusts were urged by market analysts to re-engineer their ''lazy'' balance sheets. They borrowed against their properties to acquire more properties and expanded into overseas real estate markets. The trusts' debt-fuelled growth resulted in a few years of spectacular returns. Many of their small investors had invested in the trusts prior to this because they were conservative investments providing stable income.

In a recent report on the sector, researcher Morningstar shows the trusts' income has remained fairly stable. After producing income of 3.41 per cent in 2008, they have produced income of about 8 per cent in 2009 and about 6 per cent for each of 2010 and 2011. With the cash rate cut last week to 3.25 per cent and more to come, the income from the trusts is attractive.


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