Sustained low interest rates paint a bright outlook for real estate investment trusts. What also appeals about REITs are attractive distributions for those chasing income. Combining this with a company’s ability to generate capital growth from consistent and growing income streams rounds out an investment case and why they should be part of any balanced portfolio.

James Samson, of Lincoln Indicators, says: “REITs, by their very nature and virtue of the trust structure pay 100 per cent of earnings to shareholders as distributions. Lower interest rates for a prolonged period will also boost investor appetite for above market yield, and REITs could potentially combine these two strong themes into the future.”

The Reserve Bank of Australia’s latest statement on monetary policy projects inflation to remain in the 2-to-3 per cent target over the next two years.

Samson says the XPJ index for property trusts posted a solid performance in the 2014 financial year, up 3.93 per cent.

“The key here is these companies are capital stable and offer strong returns through distribution,” he says. “Selecting those with bright outlooks and better assets, then capital appreciation may enhance the investment case.”

Today, Samson and two other market experts put forward their best REIT choices.   

BWP Trust (BWP)

Chart: Share price over the year versus ASX200 (XJO)

BWP owns and leases properties across Australia to hardware giant Bunnings Warehouse. Samson says BWP boasted a 99.3 per cent occupancy rate at December 31 last year. The weighted average lease expiry is seven years. BWP has a stable client base and posts attractive yields around 5.6 per cent.

“The company’s growing portfolio and its ability to eke out earnings growth through rental increases makes it most attractive on a risk adjusted basis,” he says. “We classify its financial health as strong.”

Cromwell Property Group (CMW)

Chart: Share price over the year versus ASX200 (XJO)

Focuses on office properties, with a small exposure to retail property and to asset management. Samson says the company’s occupancy rate remains high at around 96 per cent, with a weighted average lease expiry of 6.2 years. Samson says CMW has a strong and stable tenant profile – 65 per cent of its income is earned from government, Qantas and Origin Energy.  

“While the company’s exposure to Australian office occupancy is slightly higher risk and impacted by economic conditions, Cromwell takes a proactive approach to managing expected lease expiry,” he says. “This results in higher occupancy than the domestic market average. Risk is further offset by a very attractive dividend yield around 7.3 per cent. CMW may pose an enviable opportunity for income seekers.”

CFS Retail Property Trust Group (CFX)

Chart: Share price over the year versus ASX200 (XJO)

The company owns 28 retail assets, including several DFO outlet centres, Chadstone Shopping Centre in Melbourne, Chatswood Chase in Sydney and the recently completed Emporium in Melbourne. It manages a further 15 outlets on behalf of strategic partners. “The business continues to pay a stable distribution corresponding to an above market dividend yield of 6.67 per cent,” Samson says.

Samson says CFS Retail recently announced it had re-valued more than 60 per cent of its direct portfolio for financial year 2014, resulting in a $54 million increase in book value, which will be disclosed in the company’s annual report in August.

GDI Property Group (GDI)

Chart: Share price over the year versus ASX200 (XJO)

Ken Bloomfield, principal of Financial Clarity, says GDI owns $820 million of properties in Sydney, Perth, Brisbane and Adelaide. It also has an active funds management business, and Bloomfield says it has made money for every syndicate it’s managed for investors over the past 20 years, with average investor returns of almost 20 per cent a year.

“We like GDI as active asset managers; it acquires office properties at below management’s view of intrinsic value and then add value through refurbishment or re-leasing,” Bloomfield says. “For example, its Castlereagh office tower is ripe for residential conversion, which should result in a significant uplift in value.”

Bloomfield says the company was recently trading at a marginal discount to net tangible assets. It’s forecasting a distribution yield above 8 per cent for fiscal year 2015.

Goodman Group (GMG)

Chart: Share price over the year versus ASX200 (XJO)

Joshua Stega, of JAS Wealth, ranks Goodman as “one of the most forward thinking property businesses in Australia”. He says: “Unlike many other Australian REITs, Goodman continues to diversify its business away from particular sectors or locations and has accumulated a range of global assets with a strong development pipeline to match.”

Stega says the company has committed to a 6 per cent a year business growth target over the medium and long term. “It’s also a well positioned property yield play, recently offering 3.75 per cent,” he says. “GMG stands out with more than $5 billion of committed capital available, and a strong existing portfolio of value add opportunities.”

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