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REITReal estate investment trusts are recovering from the battering delivered by the global financial crisis

AUSTRALIA’S listed real estate investment trusts are set to regain their position as darlings of the mum and dad investors who stopped loving them during the financial crises, when the trusts’ seemingly bulletproof performance was rocked by wild volatility and huge losses.

Until then, investors would have laughed off suggestions they could lose 60 per cent to 70 per cent of their money in property-type listed securities. But that’s what happened.

However, there are signs changed property-market dynamics and a return to fundamentals by the trusts are beginning to pay off, positioning A-REITs as a defensive, investment-grade prospect for future portfolios.

“If you’re buying in [to A-REITs] now, you’re going to get quite good dividend yields on these stocks, and we’re certainly starting to see capital growth again,” senior Morningstar equities analyst Scott Courtney says.

But we’re not there yet, according to Winston Sammut, managing director of Maxim Asset Management, a boutique funds management firm specialising in listed property securities.

“The sector is yielding about 6 per cent at the moment, which is not quite enough compared [with] other sectors and with very little capital growth,” Sammut says.

In “the next phase of its resurrection”, the A-REITs market needs to increase income streams to 8 per cent before everyday investors come back in a meaningful way. Until then, income levels are not attractive enough to justify a decent exposure to them.

“Traditionally, in a balanced portfolio, you’d have 7 [per cent] to 10 per cent in listed property,” Sammut says. “At the moment it’s more like 0 to 2 per cent.”

Yet, as investors heard in recent Australian Securities Exchange listed-property roadshows, A-REITs are significantly discounted on a net-tangible asset basis (with NTAs showing the difference between a stock’s listed price and the value of its assets less the value of its liabilities).

In this environment, “it is possible to invest in vehicles with high-quality assets and steady cashflows at prices that offer reasonable margins of safety”, Property Investment Research says in a recent report.

Investors have always liked A-REITS. The trusts provide access to property types such as commercial, industrial, retail or a mix of real estate assets that investors would otherwise be unlikely to get directly, minus the costs and management complexities of owning them outright.

Given that most of the trouble experienced in the sector since the GFC hit was more a result of complex capital structures than of problems with the underlying properties, lower gearing levels and a return to core business models have brought them close to being back in the game.

You wouldn’t think so if you looked at the attached table showing how A-REITs have performed against the broader market.

Since the middle of 2008, the top 30 trusts raised more than $14 billion, an extraordinary amount in such a short time for a sector with a market cap at the end of September of about $66bn.

These funds diluted earnings in the sector by flooding it with extra units, a confluence that shows up in the table as a flattening effect on the REIT index relative to S&P/ASX 200.

“Using Westfield as a benchmark, if you eliminate the impact of the capital raisings, we estimate the A-REIT index would be travelling at around the 1250 mark as opposed to the 800 mark where we’re seeing it now,” Courtney says. That’s still some way off the 2200-level it was once at. Still, some fund managers have started reweighting their portfolios to take early advantage of the expected upside.

So if professional investors are throwing their money into these things, how should punters choose wisely from the 60 or so A-REITs?

As with any investment, it comes down to understanding exactly what it is you’re investing in and appreciating your tolerance for risk.

Courtney suggests a good starting point in choosing an A-REIT stock would be to look at a range across property types and to sort them on a premium to NTA basis.Using that filter, Courtney likes Charter Hall Office REIT (CQO), bought from Macquarie early this year. It has been trading at about a 35 per cent to 40 per cent discount to NTA. “To me, that’s too big a discount so there’s potentially big upside out of there,” he says.

Courtney also likes Mirvac Group (MGR), traditionally a residential developer but one moving to owning a mix of asset types; shopping centre landlord Westfield Group (WDC); the Commonwealth Bank managed-CFS Retail Property Trust (CFX); and diversified trust Dexus (DXS).

Drilling into that sort of detail in a note on A-REITs to clients this month, JP Morgan analyst Rob Stanton singles out Melbourne residential and office markets as “shining lights”.

He likes the Victorian capital’s residential market because of the way business growth is driving annual net migration of about 55,000 people to the southern state in recent years.

“So it makes sense that Melbourne has the healthiest office and industrial markets [of Australian central business districts],” Stanton writes.

Trusts he identifies with the best exposure to that market include Australand Property Group (ALZ), Mirvac (MGR), GPT Group (GPT) and Stockland (SGP).

A-REITs have changed strategies in the past few years. Where one may once have focused on office and retail assets, or a mix of industrial and residential, they now may be focused solely on industrial properties.

The main weakness in the sector probably remains at the small-to-medium end of the market, where players will struggle to attract investor capital during the next year.

“The banks have opened their doors again to the right borrowers, but for smaller cap stocks [those with about $500 million or less], they’re still having difficulty getting loans,” Courtney says. “It’s their ability to grow and perform that will continue to affect them for the next 12 months.”

Story by Jacquie Hayes www.theaustralian.com.au

Tags: economy, finance, funds, investment, marketing, money, research

View the original article here

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