This column had a bullish view on Australian Real Estate Investment Trusts (AREITs) last year. The sector dutifully soared as yield-focused investors flocked to them and several specialist property companies were launched through sharemarket floats.
However, in February 2015, this column downgraded its view on AREITs such as Shopping Centres Australasia, BWP Trust, Charter Hall Retail REIT, National Storage REIT, Asia Pacific Data Centre Group, ALE Property Group and Hotel Property Investments.
After delivering strong total returns, those AREITs – and the listed property sector generally – looked overvalued. Some AREITs on that list traded 30-40 per cent above their net tangible assets (NTA) and had run too far, too fast.
I wrote in February: “It’s hard to put new money into those AREITs after such strong gains. Those who invested should continue to hold, for each AREIT has good long-term prospects and is well run. New investors should watch and wait for better value during a correction.”
I added: “The AREIT sector is ripe for a price pullback or consolidation after recent price gains. The S&P/ASX 200 AREIT Accumulation index returned 26.8 per cent in 2014, and 7.4 per cent in January alone. As with the banks, falling interest rates are driving more investors into high-yielding AREITs.”
On cue, the ASX 200 AREIT index peaked in March 2015 at just over 1300 points. It has fallen almost 8 per cent since (excluding distributions). On a total return basis, the AREIT sector is still outperforming the broader sharemarket: a total return of 15 per cent for listed property compares with a 3 per cent loss over that period, Standard & Poor’s data shows.
But after recent falls, it is time to put the AREIT sector back on the portfolio watchlist, particularly for income investors seeking above-average yield.
AREITs collectively delivered solid results in the latest profit-reporting seasons, with few surprises. Earnings and distribution growth mostly met market expectations. An average expected sector yield of about 5 per cent is another attraction in a low-yield environment.
Nevertheless, the sector was still smashed. Global sharemarket volatility, an expected rise in US interest rates, and the AREIT sector’s overvaluation at its peak, relative to property values, meant it was ripe for a correction even though its fundamentals were sound.
An opportunity emerges
The market correction has created an opportunity to re-enter some of those AREITs, as I alluded to in the February column.
Asia Pacific Data Centre Group (AJD) is an example. Its $1.27 unit price compares with the latest NTA of $1.24. I have previously noted AJD, an owner of data-centre properties, as a lower-risk play on the boom in cloud-computing.
Another favoured property trust, National Storage REIT, has fallen from a 52-week high of $1.75 to 1.49. That’s still well above the latest NTA of $1.11 per security, but National Storage provides a mix of property ownership and management, giving it strong growth prospects in Australia’s highly fragmented self-storage market.
Pub operator ALE Property Group has fallen from a 52-week high of $3.94 to $3.51. Its 2014-15 was broadly in line with analyst forecasts and distribution guidance of at least 20 cents per security beat market expectation. The well-run ALE owns a portfolio of freehold properties that are leased to Woolworths subsidiary Australian Leisure and Hospitality Group.
ALE should enjoy higher rents in the 2018 review, and has shown it can lift profits rather higher than inflation through astute management. Favourable changes to gambling laws and property upgrades are other tailwinds. Morningstar values it at $3.80 a security.
Smaller pub owner Hotel Property Investments is also approaching value territory, after falling from a high of $2.86 to $2.66.
Like ALE, Hotel Property has long-term leases with a major retailer: subsidiaries of Coles Supermarkets. It has a favourable rental growth income outlook and its expected distribution yield of almost 7 per cent is higher than many of its AREIT peers.
BWP Trust still looks fully valued, despite falling from a 52-week high of $3.44 to $3.14. It has been a stellar performer with a one-year total shareholder return (including distributions) of 38 per cent. Also, it has a great tenant in Bunning Warehouses.
The growth outlook for the impressive BWP is slightly more subdued as the economy slows, low inflation weighs on its CPI-linked leases, and maturing properties have lower rental increases. Higher prices for industrial property assets, suitable for bulky goods retailers, could constrain BWP’s acquisitions and growth.
Another AREIT leveraged to major retailers, Shopping Centres Australasia Property Group, looks more reasonably priced and an expected 6 per cent yield is attractive in this market. Its portfolio of smaller shopping centres has Woolworths as its anchor tenant.
However, Woolworths’ weaker comparable store sales growth is a concern, for it suggests subdued turnover rent. An elevated number of supermarket rollouts in the past few years could also weight on rental growth. The well-run AREIT is best bought at lower levels.
Other AREITs mentioned in that February column have impressed. Hotel operator Mantra Group soared from $3 in February to $4.39 in May and has eased to $3.55 during this market correction.
The column said in February: “I like Mantra’s prospects. In the medium term, it should benefit from continued improvement in business and leisure travel. The lower Australian dollar is a big tailwind, although it will take time to be felt fully in the sector and flow through to Mantra’s earnings.” That view remains unchanged.
The other AREIT mentioned in that column, GDI Property Group, rallied from 91 cents in February to 97 cents, and has eased to 90 cents. Like other small-cap AREITs, it suits experienced investors who are comfortable with higher-risk trusts that have less liquidity.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at September 10, 2015.