Time To Re-Evaluate A-REITs?

Australia | Mar 13 2017

Brokers sift through Australian Real Estate Investment Trusts (A-REITs) and re-allocate preferences, as office returns continue to improve and retail returns deteriorate.

-Growth rate for A-REITS at lows not witnessed since FY12
-Preference is to be overweight active stocks versus passive
-Developers managing apartment settlements with minimal defaults


By Eva Brocklehurst

Having passed the latest reporting period, Australian Real Estate Investment Trusts (A-REITs) are under the microscope as brokers sift through the sector and re-allocate preferences. Active groups are envisaged doing better than passive groups.

Macquarie forecasts long-term bond yields will rise and highlights the strong negative correlation between the A-REIT sector's share price performance and changes in the long bond. The broker observes A-REITs have not had a growth rate this low since FY12.

Macquarie's strategy is to be overweight in the growth vehicles such as Goodman Group ((GMG)), Mirvac Group ((MGR)), Lend Lease ((LLC)) and Charter Hall ((CHC)) at the expense of those more passive A-REITs that are not growing earnings attractively, such as Westfield ((WFD)), Scentre Group ((SCG)) and Vicinity Centres ((VCX)).

The broker notes the fund managers - Goodman Group and Charter Hall - are still enjoying elevated transaction fees while the developers are managing apartment settlements with minimal defaults - Mirvac and Lend Lease. Brokers observe the retail segment is slowing, residential strength is lasting longer, office is better than expected and the industrial segment is running as anticipated.

In terms of individual stocks, Macquarie believes dilution via asset sales is negatively affecting Westfield, Vicinity Centres and Charter Hall Retail ((CQR)) in FY17. Cromwell Property Group ((CMW)) is underperforming because of elevated performance fees in FY16 and problematic lease expiries.

Morgan Stanley continues to prefer those stocks that can add value and deliver superior growth through development, funds management or asset management, such as Goodman and Lend Lease. The broker prefers office over retail and believes the divergence between the two asset classes will widen, as office returns continue to improve and retail returns deteriorate.

The broker's preferred play in office is through Dexus Property  ((DXS)), Mirvac or GPT Group ((GPT)). In retail, Scentre Group is considered a quality stock, while for more diversified exposure Morgan Stanley prefers Mirvac or GPT.

Morgan Stanley Upgrades And Downgrades

Despite the strong run in the year to date, Morgan Stanley believes Charter Hall will deliver superior growth in the medium term and upgrades to Overweight. The broker also takes up an Overweight stance on Mirvac and GPT. Mirvac has shown it is less reliant on a growing residential cycle and the broker believes its property trust is one of the best in the sector. GPT is expected to accelerate its growth profile as development and fund management earnings rise.

Morgan Stanley downgrades three A-REITs to Underweight, including Westfield, Investa Office Fund ((IOF)) and Stockland ((SGP)). Westfield is unlikely to re-rate, in the broker's opinion, from its elevated multiple until there is real evidence of a strategy driving superior free funds from operations (FFO) and asset growth.

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