REITs now look cheap and attractive

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In my previous review on the 7th March 2013, I reported that forecast capital gains for the property sector over the next 12 months were a negative 0.5%, and so it could only reasonably be considered as a dividend play. As it turns out, the capital gain over the last six months for the sector was a negative 1.4%, compared to an ASX 200 gain of 1.4%. When dividends – but not franking credits – are reinvested, the sector would have returned 4.7% compared to 7.3% for the broader index.

Only two stocks, Westfield Retail Trust (WRT) and Dexus Property Group (DXS), made the cut for High Conviction stocks, with Westfield being preferred to Dexus. That is, they were in the top 100 and met my ‘2.5’ broker recommendation status (please see here for details).

From Table 1, both Westfield and Dexus lost ground, but the sector also lost ground overall and the highest capital gain was 4.1% for Abacus Property Group (ABP). Over the period since my last review, Westfield’s recommendation has improved from 2.25 to 2.10, and Dexus has improved from 2.58 to 2.20. On that basis, there would be no need to change my preferences for this sector but there are now four more stocks that are worthy of consideration: Mirvac Group (MGR), Stockland (SGP), Investa Office Fund (IOF) and Federation Centres (FDC). In particular, Investa and Federation have particularly strong recommendations. Only Charter Hall Group (CHC) in the small caps group attracts attention.

Turning to Table 2, the property sector is slightly cheap (exuberance is 1.7%) and the adjusted capital gain is 6.3%. With a predicted yield of 5.7%, this sector is now very attractive indeed. Property is currently a viable alternative to financials, as that sector is quite overpriced with exuberance at 4.6%.

It should be noted that no sector is sufficiently overpriced to warrant alarm, but discretionary (5.5%) and financials are getting close to that zone. The capital gains’ forecast for the broad index has slipped since the start of the August reporting season – but only by about one percentage point. The adjusted gain forecast is only 8.0%. While that is a good number compared to long-run returns, it is not as exciting as many of the forecasts we made earlier in the year. However, we have reason to believe that the broker forecasts of dividends and earnings on which my calculations are based may soon be revised upwards.

The data from China has been so strong and unexpected by many that these results must surely have positive repercussions for the materials sector forecasts. Also, the boost in confidence following the general election, combined with some interesting movements in the household savings ratio and household personal loans, leads me to believe there might soon be a boost to the broader economy. If discretionary stocks are upgraded, that could be sufficient to erode the current high overpricing.

In conclusion, the property sector is looking good so sticking with Westfield Retail Trust and Dexus seems reasonable, but supplementing those holdings with Investa and Federation could pay dividends, as all four stocks have yields above 6%!

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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