Investors chasing growth have done well from A-REITs in the last five years. Listed real estate trusts have beaten the wider stock market by about 50% and there are still plenty of property bulls, emboldened by continued buoyant signs in some sectors.
But realists, remembering the cycles in property, aren’t convinced. The property market is cyclical and prone to wide swings, especially in residential apartments, and share prices are already heading to lofty levels.
Demand for property is being driven by speculators (who think they are investors), convinced that very low interest rates can continue for a long time and that overseas money (especially from China) is limitless.
Over the past five booming years, the S&P/ASX property accumulation index has returned 21% a year. But, scan a little further and suddenly the 10-year return sags to 3.3% pa. Oops, that would be the effect of the GFC when the A-REITs index lost about three quarters of its value – and reminded investors that cycles in property (like shares) can be savage.
Property investments, which generally involve high levels of borrowing, are very sensitive to interest rates. Developers and investors are counting on low interest rates continuing – which mainly depends on the US Federal Reserve .
SMSFs have kept their direct property holdings to around 17% of assets. ATO figures (to March) estimate direct property holdings were just under 17% of assets, up only a little against 15.5% five years earlier.
Many portfolios would hold listed property investments for good yields and capital growth. A-REITs are probably less exposed to immediate risks because the largest ones generally have much less gearing than investments in direct property.
The $150 billion or so of listed property investments aren’t one homogenous group. Retail property A-REITs represent more than 50% of the listed funds under management, with industrial property making up about 15%. The rest is spread between diversified and specialized trusts.
Some bulls argue that those A-REITs holding retail assets might not be hit by problems from the booming apartment sector where over-supply worries are causing concerns and have led to the banking regulator issuing warnings.
But that ignores the other problem – listed property investments are selling at high (and rising) premiums to their underlying assets as measured by their net tangible asset backing per share (NTA).
Many of the large retail and diversified groups are now trading at premiums of more than 20% above their latest NTAs. In the past, when A-REITs were held as defensive investments and for their income, investors kept an eye on NTAs. Today, when investors are looking at capital growth, they don’t seem to worry about paying a stiff premium for property assets.
This is reflected in the information flow. Years ago, the NTAs were listed in newspaper share lists but, today if investors want to check on these ratios, they need dig through corporate documents because the ASX now doesn’t provide a readily source of NTAs for A-REITs (as they do for listed investment companies LICs).
Among some of the leading A-REITs, Dexus, which specializes in CBD properties, is currently close to a 30% premium over its NTA. Other leading groups covering several property sectors like GPT, Shopping Centres and Stockland are some 20% above NTA a share.
Mainly residential housing trust Mirvac is at a 33% premium. In the last six months it is up more than 30% against around 4% for the A-REIT index. Another large stock, local and international industrial property specialist Goodman, is at a whopping 85% premium.
While A-REITs may not be subject to the same asset-backing rule of thumb as LICs, these levels are flashing warning signs that enthusiasm in the sector may have pushed valuations too high in what could be the latter stage of the cycle.
The high premiums appear to be at odds with growing fears of a crisis with potential failures in off-the-plan projects. While some in the industry say this might not affect the whole industry, there have been enough warnings from the regulators and lenders to remind investors to beware.
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