The global financial crisis may have spared the wider Australian economy but the real estate investment trust (Reit) sector was hit hard. Now, however, there are signs of a recovery and analysts are looking favourably at the sector’s value for money and growth potential.
It has been a tough road for Australian Reits. The tribulations of the Centro Properties Group, which last year obtained a three year extension on A$4bn ($3.6bn, £2.4bn, ?2.8bn) of its $22bn in debt, were symptomatic of the sector’s problems: a combination of high debt levels and plunging asset values.
Even now, the listed Reit sector is the seventh-worst performing on the Australian stock exchange, despite doubling in value in last year’s market rally to reach more than A$65bn in market capitalisation. In the 12 months to June 30 last year, listed Reits accounted for half of corporate Australia’s losses, topping more than $21.5bn.
From such depths, any green shoots of recovery are being welcomed by some analysts and fund managers keen to find the bottom of the cycle for a sector that has been such a traditional favourite.
Symbolic of the recovery is a recent profit upgrade for Centro, which has become something of a bellwether for the sector. Shares in Centro have spiked more than 500 per cent in the year to date.
However, Reits are different animals now than they were in the past, ignoring offshore expansion for a more domestic focus.
Peter Davidson, who heads property research at BT Investment Management in Sydney, says he sees “sound logic” in investing in listed Australian Reits.
“We have been recommending it over the last quarter, for investors who are looking for a low risk entry back into the share market,” says Mr Davidson.
“Investors will get exposure to the recovering economy, to inflation – if inflation returns – and to equity markets if they start to improve. Any of these three factors would see total returns back to our base of 8 per cent, which is 6 per cent yield and 2 per cent growth.”
He adds: “A lot of the areas of concern that dogged the market in 2007 and 2008 have largely been addressed in the last year.”
Those issues were a lack of asset sales, falling earnings growth and high gearing. Disposals in 2008 were limited, “whereas now we have good evidence of asset sales”. There is also “evidence of good earnings growth for fiscal 2010 and 2011. And gearing, which was too high at 45 per cent is now at 30 per cent.”
Mr Williams points to a number of M&A transactions and capital raisings in the sector as evidence that banks are returning to the sector to fund deals. Mirvac Group’s A$413m bid for the Westpac Office Trust was recently accepted by shareholders, and Macquarie Capital sold most of its real estate management platform to Charter Hall for just under A$300m. “A major factor behind the M&A is the willingness to approve changes as primary borrower and to approve debt moving to other parties and putting more debt into a transaction. That is the sort of thing we are starting to see and it will be good for the sector,” says Mr Williams.
“Our sense is there is a lot of money in Australia tied up in term deposits, because investors are concerned about capital preservation, and we would say this represents a relatively low risk entry back into the share market.”
Not all analysts, however, are so bullish. Goldman Sachs recently downgraded its outlook for the Reit sector, which it says is failing to win investment from offshore investors. The broking house’s target for the S&P/ASX 200 A-Reit index – currently sitting at around the 860 level – is 925 by June 30. Goldman analyst Simon Wheatley says offshore markets offer better rebound opportunities, while Australia is seen as a defensive play.
Bargain hunters might see it differently. Reits around the world have rallied, while Australian Reits have remained flat and moved sideways. With the commercial property sector starting to rebound, BT’s Peter Davidson sees A-Reits as a good tactical play now.
