Fund managers enthuse about quality industrial and office property but remain nervous about retail.
Investors seeking stellar returns from Australian property trusts need to be aware of the massive gaps between best and worst performers and the continuing volatility of key assets, such as shopping centres.
Aggregate income and capital growth for the sector are strong but returns will vary between different property classes, ranging from residential to logistics, which means active stock-pickers will benefit, according to analysts.
Charter Hall, the top performing Australian real estate investment trust (AREIT), posted share price gains of more than 72 per cent in the 12 months to June, with the company claiming the “lower for longer” yield environment drove more capital into its property funds.
Goodman Group, which owns and develops commercial and industrial property, posted price gains of nearly 60 per cent over the same period thanks to its office property portfolio and booming industrial logistics.
The worst performer was Australian-listed global property giant Westfield, whose share price slipped more than 27 per cent as investors grew increasingly nervous about exposure to the troubled global retail sector.
Scentre Group, the nation's largest retail landlord, was the second-worst performer, down nearly 8 per cent.
Damian Diamantopoulos, head of property research and a fund manager for Australian Unity, says the range of assets and markets means investors need to look beyond headline numbers and consider AREIT strategies and assets.
Listed property has returned nearly 15 per cent, compared to about 12 per cent for Australian equities, 6 per cent for global equities and about 2 per cent for cash during the 12 months to end of June, according to analysis by Barclays Capital.
Dividend yields on listed Australian trusts investing in property are averaging about 3.5 times the current 10-year bond yield and 4.5 times the cash rate, its analysis shows.
James Maydew, head of global listed real estate for AMP Capital, says: “If central banks further loosen monetary policy over the next 12 months, leading to lower bond yields, the case for investment in those AREITs that are taking advantage of global tailwinds and which offer the security of long-term income streams will become even more compelling.”
All signs are that cash rates will continue to fall, which should also attract capital flows from domestic and global investors, says Patrick Barrett, a portfolio manager at Charter Hall.
But the huge performance gap between best and worst begs the question as to whether this level of investment returns can be continued and who can deliver.
Goldman Sachs reckons last year’s top performers might not be next year's winners. Its analysis concludes top and bottom performers are mispriced.
For example, it argues Charter Hall Group is overvalued and could fall by up to 38 per cent based on its share price valuation for the next 12 months. Scentre Group is the most undervalued, it believes, with a 12-month potential return of 34 per cent.
The sector’s price-to-earnings ratio relative to the S&P/ASX200 was only 7 per cent above its long-run average and the yield spread against government bonds was in line with the 10-year average, which is important because real estate trusts are traditionally thought of as bond proxies.
Investors considering an AREIT are spoilt for choice between listed vehicles offering industrial, commercial, retail, industrial and agricultural property and buildings.
Grant McKenzie, a portfolio manager for Freehold Investment Management, which has about $500 million under management across different AREITs and infrastructure investments, says low cash rates will continue to underpin the move to quality assets with attractive yields.
McKenzie says the benefit of a fund investing in multiple AREITs is spreading risk to minimise performance peaks and troughs.
“The market will continue to pay a premium for high-quality defensive companies with predictable earnings, while remaining keen to avoid those with downgrades to earnings or outlook statements,” he says.
Other managers and analysts says the challenge will be identifying quality in volatile markets.
Rising auction clearance rates, improving optimism, low rates and easier borrowing terms should filter through to market and earnings for AREITs exposed to residential property, according to analysts.
The downside is the outlook for developers, which continue to face tight funding, construction problems and over-supply.
Key funds in the sector, such as Mirvac and Stockland, are not pure residential plays. For example, Mirvac has a diverse portfolio across office, retail, industrial and residential.
Investors need to be comfortable with their exposure to troubled sectors such as retail, warns Australian Unity’s Diamantopoulos, and its impact on overall performance. “There could be more pain to play out,” he says.
Recent results from major retailers such as David Jones reveal a sector struggling with structural and cyclical changes. The impact of online sales and debt-burdened households sitting on their wallets has hit some retailers very hard. Trusts specialising in the sector could continue to struggle, say analysts.
Diamantopoulos likes Scentre, which recently offloaded its $1.5 billion office towers above Westfield Sydney to US private equity giant Blackstone, embarking on a buyback program to shore up its sagging stock price.
This is a hot favourite, particularly logistics providers involved in reconfiguring supply chains. Strong investor demand means it could be hard to find value, according to analysts. Favourites like Goodman Group are not pure industrial plays. Centuria Industrial is attracting favourable analysts’ attention.
Vacancy rates remain low in Melbourne and Sydney. Capital values are expected to be supported by continued investment, according to Charter Hall's Barrett. Diamantopoulos's picks include Centuria Metropolitan, the largest ASX-listed metropolitan office AREIT.
Source: Originally published by Duncan Hughes in the Australian Financial Review on September 11, 2019.