The property sector, more correctly called REITS (Real Estate Investment Trusts), has long been considered a way to invest in property other than residential. Indeed, in many asset allocation frameworks, REITS are double counted as part of Australian equities and also as a representative for property exposure. The 11 members of this group in the ASX 100 are shown in the table. It can be seen that all of these stocks have high expected yields.
The majors
Only two of these stocks have consensus recommendations that pass the ‘2.5’ test (please see my paper on the Market Updates tab of our website www.woodhall.com.au for details) – namely Westfield Retail Trust (WRT) and Dexus Property Group (DXS). Westfield Group (WDC) is by far the biggest listing in this sector and its recommendation of 2.7 is not that far below 2.5, as is the recommendation for Stockland (SRG).
[1]
Some risks
One problem with this sector is that, during the GFC when credit dried up, stock prices plummeted. Indeed, credit is still not particularly easy to get but most stock prices in the table have risen 20% or more over the last 12 months.
Turning to Chart 1, I plot the recommendations over time for the three largest stocks. Not only does WRT have the best current rating, this stock’s rating has been improving throughout 2013. WDC has been holding ground in recent times but SRG has been slipping almost as sharply as WRT has been improving. In that sense, WRT and WDC are preferred to SRG.
[2]
The exuberance trace for this sector shown in Chart 2 highlights the problems that befell the sector during the GFC – and again in mid 2011 during the onset of the Greek Debt Crisis. Like the financials sector, property exuberance has bounced beautifully off the 6% dotted line that is our indicator of a correction or prolonged sideways movement. It did stay at elevated levels during the latter part of 2009 – as did most sectors – as investors piled in, hoping the GFC was over. In recent weeks, the 6% line was approached again but not breached – and that is a good sign. Exuberance has now retreated to plus 3.8% – a little high but not symptomatic of an impending correction.
[3]
Outlook
We have the sector’s capital gains growing by 3.3% for the next 12 months. Since the current overpricing of the sector by 3.8% nullifies that expected growth, we see this sector as only a dividend play over the next 12 months. With one-year term deposits at just over 4%, such a dividend play may be not such a bad idea.
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.
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