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Page last updated Tuesday, 13 July 2010
Equities Bulletin - Issue 55 : July 2010
Spotlight on the Australian Listed Property Sector
By Zac Zacharia
Overview
One of the historic strengths of the Australian listed property trust (A-REIT) sector was its disclosure levels. This historic sector strength became a weakness through the stapling of development/operating businesses to the traditional ‘rent collector’ model, changes in accounting standards, the debt-fuelled bull market and rapid offshore expansion. Disclosure levels have improved markedly of late and the most recent reporting season has seen even further improvements in this regard. We now have a better understanding of balance sheet issues and lending pressures than prior to the global financial crisis (GFC) and this has given investors some degree of clarity in the underlying businesses.
Generally balance sheet leverage is far more manageable now for the trusts and, despite rental yields having moved 19% higher, the sector’s look-through gearing, at 35%, is well below the pre-GFC highs. This is primarily due to the injection of substantial equity over the past year. However, the access to credit remains the weak link in the Australian REIT turnaround as it dampens the growth story.
This sector held its relative ground against the broader market over the past year and now represents 5.5% of the overall market (5.3% in 2009). Like most sectors in the Australian market it is dominated by a few select stocks, led by sector heavyweight Westfield Group (WDC), although it has lost considerable ground to the rest of the sector, and now represents 39% (52% in 2009!) of this total. A distant second, but still well ahead of the balance of the stocks in the index is Stockland Group (SGP) at 14% (13% in 2009). The third largest stock is, GPT Group (GPT) at 8%. At a similar of index weighting is Mirvac Group (MGR) (7%), Goodman Group (GMG) (6%), Dexus Property (DXS) (6%) and CFS Retail Property Fund (CFX) (6%).
Comparison of A-REIT sector to the Market
The chart below shows the weekly price trend of the A-REIT sector (blue line) overlaid against the S&P/ASX 200 Index – (red line). The chart clearly shows how the A-REIT sector had bottomed out at the same time as the overall market, but hasn’t followed the recovery with the same strength as the broader market since the lows in March 2009.
* Source: IRESS. Past Performance is not to be relied on as an indicator of future results.
If we overlay the 2 charts using a common base of 5 years ago, one can gain a better appreciation for relative performance of the A-REITS to the market. Clearly the A-REIT sector was savaged more than the overall market through the GFC, and also it has recovered less in relative terms. Given the improving fundamentals this supports the view that the sector has upside potential.
* Source: IRESS. Past Performance is not to be relied on as an indicator of future results.
Outlook for the A-REIT sector
Fundamentally, the sector as a whole is still facing a number of headwinds, not so much in terms of overall financial stability, but in terms of growth from this point. In the near-term we have what appears to be a Mexican stand-off. Margins of 2.5-3.0% for new debt are very high relative both to historic levels and the level of risk the banks are factoring in against the trusts balance sheets.
Many trust CFOs appear to be holding off on working through extending debt expiry profiles, waiting either for bank lending conditions to improve or bond markets to re-open domestically, or a combination of both. The effect of this is to dampen the growth prospects of the sector until more acceptable funding parameters are visible.
We have seen two substantial shifts over the last two years in the portfolios that make up the A-REIT sector. Firstly there has been a rapid shift back to Australian exposure versus offshore, with Australia now representing 63% of total assets, and secondly a substantial overweighting in Australia to shopping centres (60% of the domestic assets). These are important shifts, both of which have favoured our preferred long-term real estate exposures.
Commercial property valuations underpinning listed property trusts make a lot more sense now than at any point in the last 3 years and are set up against de-risked balance sheets. With debt levels now well under control and conservatively placed for the majority of the Trusts, now is the ideal time in the cycle for investors to gain exposure to the property trust sector.
From a technical perspective, the chart below shows the consolidation of sector since September 2009. The recent price trend is clearly sideways and occurring in a technical chart pattern known as a flag. Generally, the longer the consolidation period takes, the more sustainable the new trend will be when it breaks out.
A new trend will be confirmed once price breaks out of this flag pattern and has confirmation with momentum and volume. An uptrend is confirmed if it breaks upwards through resistance forming higher highs and lows and positive momentum and positive volume, and a downtrend is confirmed on a downward break of support forming lower highs and lower lows with negative momentum and negative volume. The volume trend during the consolidation however suggests a strong possibility that an eventual breakout will be to the upside.
Summary and Preferred Stocks
The A-REIT sector clearly has been oversold following the GFC, and has recovered less than the overall market (the banks and mining companies in particular). With the fundamentals for the sector slowly turning positive, it is going to be just a matter of time before the prices are re-rated to reflect confidence in the prospects for sector.
Amongst the large cap names our preferred trusts are Westfield Group (WDC) and CFS Retail (CFX) amongst the shopping mall operators, and Dexus Property (DXS), ING Office (IOF) and Charter Hall Office (CQO) (the new name for MOF) for their office exposure.
Alternatively, an investor seeking exposure to the sector (to diversify their risk across all the shares in the sector) may also consider investing in an exchange traded fund product such as SPDR S&P/ASX200 Listed Property Fund (SLF), rather than an individual share.
Below is a table that compares the stocks within the Property Sector that we research to show their fundamental relativities.
* Source: Ord Minnett Research Stock Universe. Intraday Prices as at 28 June 2010.
This article contains general financial advice only and does not consider your personal circumstances; you should determine its suitability to you prior to making any investment decision. Before acquiring a financial product you should consider the relevant product disclosure statement. Past performance is not a reliable indicator of future performance.