Balance sheet management in the property fund sector remains conservative, with average fund leverage around half peak levels of a decade ago.
According to Property Investment Research’s Australian Property Funds Industry Survey 2017, leverage fell from 27 per cent in 2015 to 23 per cent last year. This is the lowest level recorded in the history of the survey and well below the peak of 42 per cent in 2009.
The amount of debt fell 5 per cent to $77.9 billion.
High debt levels got a number of property funds into trouble during the financial crisis, when they could not refinance.
The PIR survey covered 77 managers with $332 billion of assets in 284 funds at December 2016. In addition, there were 34 property securities funds. Assets under management grew by around 9 per cent over the year.
While the number of funds grew 13 per cent to 284 over the year, the number of property securities funds fell 17 per cent to 34.
According to the survey, leverage is higher among listed property trusts (AREITs), at 32 per cent, compared with unlisted retail funds, which have average leverage of 29 per cent, and unlisted wholesale funds, which have average leverage of 13 per cent.
Debt cost remains low. “REITs can access the long-duration USPP debt market at margin around 1 per cent, while unlisted retail syndicates can lock in five-year debt at all-in costs below four per cent,” PIR says.
The average management expense ratio was 55 basis points for AREITs, 61 bps for unlisted wholesale funds and 95 basis points for unlisted retail funds. There was little change from the previous survey.
Weighted average lease expiry was 6.6 years for AREITs, 5.7 years for unlisted wholesale funds and six years for unlisted retail funds.
One long-term trend is that AREITs are losing share to unlisted wholesale funds. Traditionally AREITs dominate the survey universe, with share as high as 60 per cent. Last year that share was down to 50 per cent.
Unlisted retail saw the greatest increase in new funds, at 31.
Interestingly, there are 16 residential property funds with $8.6 billion of assets and another eight funds investing in residential development. It is often said, incorrectly it seems, that fund managers do not like to invest in residential property.
Over the year ahead PIR expects strengthening property valuations to support continued growth in AUM. AREIT managers may find it difficult to buy assets at acceptable prices or buy assets that meet earnings expectations.
Yields fell slightly because of capital growth. AREITs paid an average distribution of 4.6 per cent of net assets, unlisted wholesale trusts paid 4.7 per cent and unlisted retail funds paid 5.5 per cent.
The top managers were Scentre Group, with assets of $34.3 billion, Goodman Group ($33.7 billion) and AMP Capital Investors ($28.9 billion).
In the unlisted retail market the leaders are Charter Hall, with assets of $2.5 billion, AMP ($1.9 billion) and Centuria ($1.1 billion).