An interesting trend in the Australian Real Estate Investment Trust sector is the arrival of small, specialist AREITs with exposure to long-growth sectors such as self-storage and cloud computing. These AREITs offer decent yield and reasonable growth, albeit with higher risk.
Achieving yield and growth from AREITs has been hard work in the past 12 months. Only a third of the S&P ASX 200 AREIT index’s 9 per cent return (including distributions) came from price growth over 12 months to June 3, 2013, S&P data shows. Thank heavens for yield.
Also, the AREIT index badly underperformed the broader sharemarket’s 17 per cent gain over 12 months, as measured by the S&P ASX 200 Accumulation Index. After soaring between mid-2011 and mid-2013, the AREIT index tumbled last year, before recovering some of those losses this year.
Headwinds are building for commercial, retail and industrial AREITs. Higher office supply and a soft white-collar job market are a threat for office towers; sluggish consumer sentiment and spending is tough for retail property; and manufacturing woes are affecting industrial property in some states.
Specialist AREITs are less affected by these trends. Take National Storage REIT as an example. It raised $123 million through an Initial Public Offering in December, becoming Australia’s first listed self-storage AREIT. Its 98-cent issued stapled securities have rallied to $1.33.
National Storage is a play on long-term demand for self-storage as capital cities become more congested, and as people who live in apartments need to rent extra space. More people renting properties, and changing addresses more often, also favours self-storage providers. Those needing extra space have little choice but to rent self-storage space as there are few substitute services.
National Storage is this market’s third-largest self-storage provider, with 62 centres in six states storing goods for 23,000 residential and commercial customers. It ranks behind market leader Storage King and Kennards.
The self-storage market is highly fragmented. There were 879 self-storage operators in FY14, according to business forecaster IBISWorld. Cashed-up providers such as National Storage have been busily buying small, independent self-storage operators and consolidating them.
National Storage acquired a Townsville-based self-storage facility for $17 million in April – its first standalone acquisition, and a sign that it is starting to acquire larger properties. The Townsville property will be the largest by lettable area in National Storage’s portfolio. The acquisition of a Melbourne self-storage asset was announced in May.
Another attraction is the ability to add extra services such as selling boxes and specialist storage for higher-value goods. What was once a boring, commoditised sector is becoming more sophisticated as National Storage leverages its intellectual property across more property assets.
But National Storage has run fast and too far for now. At $1.33, investors are paying a decent premium for its assets, given National Storage’s latest reported net tangible assets (NTA) of 93 cents. Long-term investors should wait for better value.
Another AREIT, Asia Pacific Data Centre (APDC) Group, looks better value. It raised $88.5 million through the issue of $1 securities (partly paid) in December 2012. Fast-growing data-centre operator NextDC spun its property assets into APDC and leased them back, becoming its sole tenant.
APDC basically collects rent from NextDC for use of the facilities over long leases, and Next DC funds ongoing capital and maintenance requirements, in turn reducing APDC’s development risks. It owns data centred in Sydney, Melbourne and Perth.
True believers in the potential of standalone, state-of-the-art data centres will be attracted to APDC. It provides exposure to the data-centre trend at lower risk than operators such as NextDC, which have to find tenants and manage the rapid roll-out of these complex centres.
NextDC floated in 2010 because it believed the data-centre industry had not kept pace with growth in demand for data storage because of chronic underinvestment. The sharp increase in internet and video communication meant large companies would have to store more data off-site.
APDC has had a slow start since listing. Its $1-issued share rallied to $1.20 soon after listing and now trades at $1.07. On a 9 cent per share distribution, APDC would yield 8.4 per cent at the current price – a solid yield for income seekers who can tolerate higher risk with small AREITs.
APDC’s latest reported NTA was $1.02 per security, meaning it trades at only a slight premium, despite its first-mover position in data-centre ownership, and alliance with industry star NextDC. There should be scope for increases in the valuation of its data centres in coming years, given expected growth in demand for these services.
Incidentally, Macquarie Equities Research began coverage of NextDC in April with an outperform recommendation and a 12-month share-price target of $2.33, which compares with the current $1.88 price.
It wrote: “There is high demand for data-centre capacity due to the exponential growth in internet traffic, data consumption and storage drive by cloud computing and the trend towards outsourcing. We believe there are first-mover advantages for NextDC.”
APDC will benefit as NextDC signs up more customers and opens more centres. A few funds have emerged as substantial shareholders in APDC in recent weeks. Industry super fund HESTA announced a 5.2 per cent stake, as did Bennelong Funds Management. Well-performing PM Capital is another large shareholder in APDC.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at June 4, 2014.
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