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Warning on ‘frothy’ property trusts as investors chase yield


Their unit prices can move away from the valuation of the properties the trusts own – their net tangible assets (NTA).  As investors chase yield, they bid up the prices of the units relative to their asset-backing.

Anton Tagliaferro, founder of fund manager Investors Mutual, said many REITs are now trading well above the total value of their assets.

“While we acknowledge that many REITs have solid business models… many are trading today at very toppy and hard-to-justify valuations,” he said.

Almost every trust is trading above its net asset value. The unit price to NTA ratio of two major property trusts – Mirvac and of Dexus – recently peaked at more than 1.3 times.

The trouble with that is if there was a sustained sell off in the market, generally the unit prices could fall by more than shares across the entire market. That has happened in the past.

Mr Tagliaferro points out that REIT sector, in theory a defensive sector, dropped 76 per cent from its 2008 peak to trough during the early phases of the Global Financial Crisis.  The broader market fell by about 55 per cent, peak to trough, during the same period.


He is also concerned about the valuations on some of the Australian-listed technology stocks, such as Wisetech, Afterpay and Zip Co, whose shares have soared in value.

“Stocks such as these are now collectively valued at tens of billions of dollars, despite their business models being largely unproven,” he said.

“We are also seeing several biotech or early stage pharmaceutical companies, such as Avita Medical, Pro Medicus and Nanosonics, soaring to billions of dollars of market value, putting these stocks on very frothy and, often, very unrealistic, valuations,” Mr Tagilaferro said.

“In our view, the valuations of many of these types of companies have lost touch with fundamentals.

“Yet, investors seem happy to pay earnings multiples well into the hundreds on the view that a company might be the ‘next big thing’,” he said.

“While it is possible that one, or perhaps even two, of these companies may one day end up justifying today’s sharemarket valuations by earning hundreds of millions of dollars in profits in the next decade or two, the truth is… the vast majority …will not fulfil the promise, Mr Tagliaferro said.

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