Stock Selection Key For A-REITs In 2020

Australia | Jan 23 2020

Prospects exist for strong returns from the A-REITs in 2020 but brokers point out the secret is in stock selection.

-Cash flow, asset growth and sub-sector performance key in 2020
-Mixed views on outlook for residential A-REITs
-Industrial/office remain most in demand


By Eva Brocklehurst

They may be underperforming the rest of the market but Australian Real Estate Investment Trusts (A-REITs) have begun 2020 strongly, adding 6% in the first few weeks.

Official rate cuts anticipated in 2020 - JPMorgan economists forecast two - should drive further compression in required returns. Moreover, the broker suggests considerable acquisition capacity exists in many cases and the cost of capital remains competitive.

As global growth accelerates, Macquarie anticipates yields on 10-year bonds will increase to 2.5% in the US and 1.9% domestically over 2020. This is, in isolation, a negative for the A-REITs sector, given the negative correlation historically.

Nevertheless, the broker assesses yields under 2% domestically are still positive for A-REITs, and in this environment the fundamentals of the specific stock will come into greater focus.

Hence, a combination of earnings revisions, cash flow certainty, asset growth and sub-sector performance will be key to deriving returns from the sector, which is screening value, albeit skewed by retail A-REITs.

Half the sector sits in the retail segment, the broker points out, which warrants a higher yield or lower multiple, given structural headwinds continue. This will impact earnings and distributions in the medium term.

While Macquarie considers it too early to make a call on retail conditions, offshore retail property experience indicates the grocery-anchored malls have historically outperformed discretionary malls.

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