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Of the sectors caught up in the credit crunch here, none have been hit harder than listed property trusts.
This week Mirvac showed the sort of stress that the industry was under by slashing its forecast earnings and distributions to investors.

As Kathy Swan reports, the property trusts fall from being high yield safe havens to risky, debt-ridden investments has been rapid.

It's been a shocker of a year for the listed property sector.

Its value's been slashed from last October's peak, wiping out around $40 billion, and it may get worse.

Bricks and mortar used to be good solid investments, we're forecasting over the next 12 to 18 months that they will be a bad investment

Investors felt the first disturbing rumble in December - when Centro Properties Group announced a $4 billion funding shortfall.
Just two weeks ago, one of the pioneers of the sector, the respected GPT Group, announced a shock profit downgrade, prompting an immediate cut in its credit rating, which will only make life tougher by forcing up its borrowing costs.

GPT used to be our highest rated AREIT in the world, it used to be AA-minus

The change in sentiment has seen the ASX 200 property index dive 40 per cent since its peak in October, a dismal underperformance even when compared to the decline on the broader market.

It's a period characterised by a desperate sale of assets to cut debt, write-downs in value for those properties that have been held on to, and now just to make investors even more queasy, their cherished distributions are being cut.

The problems with the credit markets really go to the core of this

Louis Christopher, head of property research at Adviser Edge, says thanks to the on going credit crunch, real estate investment trusts with high debt levels are in a tricky situation.

In the commercial property market in the first six months of this year, a situation where capitalisation rates - a method we use to value commercial property - have gone up by about one per cent - in some cases it's gone up more, in some cases less, and those real estate investment trusts where they've been highly geared and they've seen their capitalisation rates increase by that
amount, what it translates for them is basically an automatic 20 to 30 per cent decrease in the real value of the properties

Debt levels and falling asset values are bringing the AREITS, or Australian Real Estate Investment Trusts, under close scrutiny by the market and global ratings agencies.

We have two AREITS on a negative outlook, being Mirvac and GPT, the remaining of our AREITS are all on stable outlook - we don't have any AREITS on a positive outlook.

Standard & Poor's Director of Corporate Ratings, Craig Parker, says however, the sector as a whole is still investment grade

The entities that stuck to their knitting - that are actually investment entities in high quality assets - are the CFS retails, the Stocklands, the Westfields of the world and as consequence, they have a lower probability of default and they are in the A category

But in a volatile market - few pause to consider the detail of debt levels - according to Stephen Day, Executive Director of Valad Property Group.

We've gone past the part where the market I think has probably overreacted on the upside last year and now it's probably overreacted on the downside this year and thrown out most companies in the same basket - but I think the investors and the brokers are starting to understand that all the businesses are somewhat different - ours is lowly geared.

But Valad's still down as much as 70 per cent from last year's market peak, and that's despite this week's overall rally for the sector.

We've obviously suffered just as much as everyone else has on the market place, in terms of where the share place has ended up, drifting much below what we think is fair value

We're at the dark side of the moon, we've got to get round to the other side and that will take some time, and these cycles normally last, you know, one to five years.

A few days ago, property developers and managers Mirvac cut its earnings forecast and investor payout for next year, although 2008 is in line with earlier guidance.

Earnings were $352 million, which was towards the top end of our range of $362 million that we put out a month and a half ago.

Managing director Greg Paramor also says Mirvac's going back to using cash as opposed to debt for its reduced distribution to investors.

We believe going forward, that a better way to do it is pay out trust earnings - which in our case for 2009 will be approximately 20 cents, paying out only 20 cents means we'll be retaining the earnings from our corporation, that is used to pay down debt and is used for other development activity

Reducing debt is one step in restoring stability and investor confidence, but the sector may yet be taking two steps back. More grim news is expected next month, when reporting season hits its stride.

It's very much sticking to your knitting at this stage, and it's not a time to be too ambitious or too aggressive

All around town, people are running a ruler over things - there will definitely be M and A activity.

Bargain hunters may be eyeing off buying opportunities, but to go shopping requires cash or credit, and there's not a lot of either about.