What’s behind the rise in house prices (and what to do about it) | Forecast and reality: How property trusts perform | And more...
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Imagine it. Your fund manager has just sold a stock that on almost every measure, from valuation and consensus to intuition and common sense, looks cheap. Why aren’t they buying rather than selling?

Seeking an explanation for what seems like a poor decision, their response dumbfounds you. “We sold down because everyone else is doing it.”

It sounds ridiculous, doesn’t it? Until you realise this is the only possible excuse for a gaggle of index fund managers (a collective noun for the species has yet to be invented) selling down Scentre Group, a listed Australian property trust that owns arguably one of the best portfolios of retail assets in the world.

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According to real estate consultancy firm Red23, lot sales in Melbourne are averaging a record 65 a day with more than 20,000 sales over the past 12 months. The rate of growth in the city’s population, however, indicates around 27,000 new homes are needed each year. No wonder house prices keep rising.

That poses a problem for investors and homebuyers alike. Housing affordability is at an all-time low; credit is becoming harder to obtain; and banks are pushing interest rates upwards out of cycle. Against that backdrop, it’s hard to imagine residential house prices performing as strongly as they have recently over coming years. What are investors to do?

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In the long term, yield is the primary driver of unit prices. That indicates the real question investors should be asking right now, which is whether the yield is sustainable and likely to grow. If so, unit prices will take care of themselves.

Making that assessment isn’t easy. To help out, we examined the distributions paid by property trusts over the past year to see how performance matched the guidance offered by management during the 2016 results season last August. In other words, did reality match forecast and ambition?

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