Australian listed real estate investment trusts (A-REITs) have been the best investment over the past 12 months, returning close to 20 per cent. But not all have done well, because of their exposure to the weak retail or residential sectors.
The current sector yield is around 6 per cent, offering a good income return, but like all listed securities A-REITs can be volatile.
The sector index was up 18 per cent over the 12 months to the end of April but fell 2.3 per cent in April
Macquarie Securities has reviewed the sector and rated six listed real estate investment trusts ‘outperform’. They are APN Industria, Charter Hall Group, Goodman Group, Lendlease Group, Mirvac Group and Peet Ltd.
Macquarie believes the retail market is the sector’s trouble spot. It says: “We believe the cash flows being generated by retail REITs remain under increasing pressure. Trading updates for the March quarter were soft, with sales slowing to 1.6 per cent – down from 2.1 per cent in the December quarter.”
There are about $11 billion a mall assets on the market, which is not helping capital values. There are risks in high yielding retail REITs – Stockland and Unibail-Rodamco-Westfield.
And there is a question as to whether current weakness of cyclical or structural (due to the long-term impact of e-commerce).
On the residential front, Macquarie says Labor’s plan to change the negative gearing and capital gains tax rules would reduce dwelling prices about up to 2 per cent.
REITs in the residential market have reported that sales are down. They expect the current financial year to be the bottom.
A quicker recovery could be achieved if the RBA cuts rates, APRA moderates some of its lending rules or the Coalition retain government (which would mean no change to negative gearing).
On the office front, demand is expected to be subdued with increased uncertainty delaying business decisions for the first three months or so post-election. The amount of new supply coming into the market is in line with the long-term average and there has been steady demand.
Macquarie says an attractive feature of Australian commercial property assets is long lease structures with locked-in rental growth. These conditions provide reliable growth in cash flow.
REIT performance has been driven by the decline in the government bond yield. REITs are defensive assets but there are concerns about the retail and residential sectors that are making investors wary.
Current sector yield is around 6 per cent. The margin above the 10-year government bond rate is higher than the long-term average. This might be read as a buy signal but Macquarie is cautions . “Given the constitents of the A-REITs being skewed towards retail, which has structural headwinds, we believe the spreads can remain above historical averages,” Macquarie says.