Question: Do you have a view of G8 Education (GEM) at current prices? Is it oversold?

Answer (By Paul Rickard): Unquestionably, it is oversold. The question is – has it bottomed yet?

The good news is that the short sellers aren’t that active (only 3.43% of ordinary shares are sold short), and the brokers think it is undervalued. According to FN Arena, there are 3 buys/2 neutrals – and the consensus target price is $3.72 – quite a bit higher than this mornings open of $2.82.

Bottoms are hard to predict, and sentiment doesn’t usually change that quickly  – so I would exercise a little caution.

Question: My question relates to those REITs that are currently trading at near their NTA value. In the absence of rising bond yields also driving a devaluation of commercial property, would the underlying value of their assets be a protective factor for any REITs trading at around their underlying value?

Answer (By Paul Rickard): Being at or close to their NTA will help, as will lower gearing. However, the NTA is largely a function of the capitalisation rate. This is a market-determined rate – but a rate which over time is positively correlated to the bond rate. So, higher bond rates normally translate into higher capitalisation rates.

The questions I would be asking about the REIT are:

1. When were the properties last valued?
2. What were the cap rates used?; and
3. Since the valuation, what has happened to the leasing profile/rents received?

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 regards to your circumstances.