As official interest rates have slid over the last decade, from 7.25% to a record low of 1.5%, and term deposit rates have more dropped from the 7%-plus levels, to average five-year territory of 2.6%, Australia’s real estate investment trust (REIT) sector has played an important role in yield-oriented portfolios.
According to specialist property investment consultancy Atchison Consultants, A-REITs are currently offering income yields in the region of 5.5%, unfranked.
After a bad experience in the GFC, when the A-REIT sector geared-up and went chasing non-core activities like property development, syndication, management and property services, the trusts are now back doing what they are supposed to do – passing on rental income to their unitholders. Thus, they are once again considered a sound defensive investment.
However, there are several factors at present that are making A-REIT investors nervous. REITs are generally considered bond proxies: when bond yields rise (that is, bond prices fall), yield-sensitive sectors like REITs fall out of favour – and the larger REITs tend to be more affected, because they are more liquid.
Another factor is that much of the A-REIT sector represents retail property, and retail in Australia is struggling: department stores are battling against online retailers and a general reluctance on the part of households to spend, given weak wages growth and an easing housing market.
Against that, though, signs are emerging of an uptick in corporate activity in the sector, which has just seen the $33 billion takeover of Westfield and a $3.1 billion bid for Investa Office Fund by US private equity giant Blackstone.
Westfield has gone to French property giant Unibail-Rodamco, (read Tony Featherstone’s take on the takeover here). And subsequently we’ve seen Blackstone lob its $3.1 billion friendly takeover bid for Investa Office Fund. Broker Merrill Lynch reckons Dexus Property Group – which made a takeover play for IOF in 2015 – could be tempted to make a counter-bid for IOF, funding it by selling its $2 billion-plus industrial portfolio to concentrate on office property.
A-REIT investors will be very interested to see whether the Blackstone/IOF bid is the harbinger of a flurry of international capital picking off undervalued Australian property assets.
The other interesting aspect of the corporate activity is that, according to broker Citi Research, US$2.67 billion ($3.5 billion) will flow back to local investors from the Westfield takeover. Where will that money go? Citi does not believe the cash will be reinvested in local shopping centre REITs – not even Scentre, which owns the Westfield shopping centres in Australia, or fellow retail heavyweight Vicinity Centres, owner of the largest centre in the country, Melbourne’s Chadstone – but will instead flow to trusts with overseas exposure, such as Lendlease, or logistics giant Goodman Group. More than 55% of Goodman’s earnings come from overseas, while about 30% of Lendlease’s earnings are generated abroad. Goodman and Lendlease are good long-term value, but the market has pushed both stocks past fair value.
Goodman Group (GMG, $9.37)
Five-year total return: 16.9% a year
FY19 estimated yield: 3.2%, unfranked
Analysts’ consensus target price: $8.80
In November last year, I included Goodman Group (at $8.65) in a group of stocks that were ways to “play” the growth in online retail, because the online explosion means that merchants and distributors need large warehouses and efficient supply chains, and as consumer expectations around product delivery and availability rise, landlords like Goodman are at the centre of that. For instance, Amazon is its largest tenant.
Goodman is tapping into the growth of e-commerce and the need to deliver goods quickly to consumers by developing huge new logistics facilities and multi-level warehouses close to major urban areas. A case in point is the recently completed 235,000 square-metre logistics centre – the largest in Europe – that the company completed in March for German retail food giant Metro. It is a highly automated and very efficient distribution hub, close to consumers, and Goodman is at the forefront of this trend. The other major development trend is multi-level warehousing because of a scarcity of land and increasing pressure from e-commerce, data centre users and urban renewal on land use.
Lend Lease (LLC, $18.89)
Five-year total return: 18.4% a year
FY19 estimated yield: 3.9%, unfranked
Analysts’ consensus target price: $18.68
I tipped Lendlease back in September 2015 at $13.30, as a “battered blue chip” that could be on the way back, and the stock has lived up to that promise, having risen to $18.89. The major attraction of Lendlease is its status as a global leader in major urban regeneration projects: it has a $40 billion pipeline of these developments. The strategy targets 17 of the world’s gateway cities in Australia, Asia, Europe and North America – at the moment Lendlease has projects underway in eight major gateway cities, including Sydney, London, Chicago, Boston, San Francisco, Milan, Singapore and Kuala Lumpur. Lendlease is going really well, but the stock price has run too far for it to be a buy.
So, where is the best value in REITs? Here are my best five.
Vicinity Centres (VCX, $2.67)
Five-year total return: 7.8% a year
FY19 estimated yield: 6.2%, unfranked
Analysts’ consensus target price: $2.90
If shopping centre heavyweight Vicinity Centres is supposed to be struggling because of the stagnant retail environment, it is certainly doing its best to make the most of what it has. Today the trust announced plans for the sale of up to $1 billion of sub-regional and neighbourhood shopping centres, to use the money to invest in the development of other properties. That will take the clean-up of its portfolio to $1.13 billion over the financial year, to raise money to invest in the trust’s powerhouse “destination” malls, like Chadstone in Melbourne and the Queen Victoria Building in Sydney. The switch to focus on the higher-value assets is a good one, and should underpin the cash flows and attractive yield. Vicinity also controls a substantial factory outlet portfolio under the DFO brand: it is a strong retail portfolio.
Scentre Group (SCG, $4.14)
Five-year total return: n/a
FY19 estimated yield: 5.5%, 10.8% franked
Analysts’ consensus target price: $4.46
Scentre is widely considered a lower-risk retail exposure because it owns arguably the best portfolio of retail assets in Australia, the Westfield-branded centres, which shields it to a large extent from the negative sentiment around retail, and online competition. Like Vicinity, Scentre is actively “curating” its portfolio to focus on the strongest retailers, that have a high degree of “experiential” attractiveness to shoppers: this strategy sees the shopping centres as world-class shopping and social destinations. The trust is a very strong financial performer, it is conducting a $700 million unit buyback, and is also in a strong position to sell some assets and strengthen its balance sheet.
Stockland (SGP, $4.13)
Five-year total return: 8.7% a year
FY19 estimated yield: 6.8%, unfranked
Analysts’ consensus target price: $4.46
Australia’s largest diversified property group, the $10 billion Stockland develops, owns and manages retail centres, business parks, logistics centres, office buildings, residential communities and retirement living villages. The group is overhauling its asset mix, growing the industrial portfolio – especially logistics and business parks – and boosting the residential exposure, while making a gradual exit from the office property sector. Because of the weak Australian housing market, broker UBS recently downgraded Stockland to a sell, saying that it expects house prices to fall by 5% or more in 2019 as lending standards tighten and higher living expenses limit borrowing capacity, and that this will flow into weaker earnings for Stockland.
But other brokers are not so concerned, according to FN Arena. Stockland is changing its mix and in particular, plans to increase its exposure to the industrial segment from 14% to 20%, while investing in logistics and business parks, and pivoting its residential exposure to the retirement and medium-density housing development areas.
Ingenia Communities Group (INA, $2.69)
Five-year total return: 10% a year
FY19 estimated yield: 4.7%, unfranked
Analysts’ consensus target price: $3.30
Specialist retirement living and budget tourism REIT Ingenia Communities Group taps very specifically into Australia’s ageing population and the “grey nomad” travellers. Ingenia operates in the seniors living and holiday village sector, with demand coming from travelling seniors and budget-conscious families. It picks up on the “grey nomads” selling the family home and travelling around the country, before settling into low-maintenance and affordable accommodation. Ingenia has a $700 million portfolio of 59 communities, more than 5,000 residents, and 790,000 room-nights a year in its tourism facilities.
Viva Energy REIT (VVR, $2.03)
Five-year total return: n/a
FY19 estimated yield: 7.2%, unfranked
Analysts’ consensus target price: $2.39
Specialist REIT Viva Energy only owns service stations: it has a $2.3 billion portfolio of 438 high-quality service station and convenience-store properties, geographically diversified across all Australian states and territories, and with 100% occupancy. This portfolio throws off a rising distribution stream that is expected to yield 6.9% this year (calendar 2018) and 7.2% in 2019. VVR is a very good diversifier in an income portfolio.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
