Australia | Sep 07 2021
How badly is outlook for the A-REIT sector affected by the latest wave of coronavirus and lockdowns? Where does the growth lie?
-A-REITs generally have healthy balance sheets and liquidity
-Record prices, higher asset values should drive performance fee increases
-Is the market underestimating the growth potential of retail A-REITs?
By Eva Brocklehurst
In seeking areas of growth from listed property vehicles, Australian real estate investment trusts (A-REIT), brokers are sifting through the evidence from the various asset classes, noting few provided much in the way of earnings guidance during the latest reporting season.
Therefore, visibility on the sector is clouded by uncertainties, largely relating to how the economy will emerge from the current lockdowns. Those that have provided guidance, such as fund managers and residential portfolios, tend to have more favourable operating fundamentals, Citi observes.
Yet Jarden warns, while A-REITs are trying to do more with funds management, history has shown many are unable to show consistent returns or the growth that is required.
Credit Suisse notes A-REITs outperformed the ASX 200 in July by 3.76% and delivered a total return of 6.26%. A yield spread over bonds of 2.59% is also above the 2.0% longer term average, and should provide continued support.
Forecasting FY22 sector growth is a function of a recovery in some A-REITs, the broker suggests, while for others a continuation of the track record is key. Overall, Credit Suisse notes balance sheets are generally healthy and there is good liquidity across the sector, while the refinancing risk remains low for the short term.
Finding avenues for growth is key to Macquarie's view, as returns ease back. Core businesses are observed to be under pressure from structural changes in office and retail. As a result, A-REITs such as Dexus Property ((DXS)) and Stockland ((SGP)) have re-positioned their focus on returns via capital recycling.
Vicinity Centres ((VCX)) is looking to mixed-use developments and Lendlease ((LLC)) is employing cost reduction targets. Funds management ambitions have also been emphasised by Dexus, Vicinity Centres, Mirvac Group ((MGR)), GPT Group ((GPT)), Stockland, and Growthpoint Properties ((GOZ)) alongside those growing their funds management arm such as Goodman Group ((GMG)), Charter Hall Group ((CHC)) and Lendlease.
Macquarie believes the current slowdown in the economic cycle is positive for A-REITs, although an increase in yields resulting from a tapering of financial stimulus by the US Federal Reserve remains a risk. Goldman Sachs emphasises defensive characteristics, including long lease terms with essential services, strong rental escalation and government support in areas such as childcare.
Macquarie continues to believe earnings growth is on the cards for Charter Hall and Goodman Group, supporting Outperform ratings. Dexus is upgraded to Outperform given the resilience of its earnings and valuation, the broker noting the recent capital recycling program has improved the quality of assets and should be accretive to cash flow.
Macquarie also retains a preference for Mirvac amid upside from the apartment pipeline. Meanwhile, some uncertainty exists for Stockland because of the business review and despite resilient land sales.
Citi has a contrary view, with a Sell rating on Dexus because of structural headwinds in office. A growing divergence between rents and asset values is expected as the weak fundamental backdrop combines with increases to book values.
Looking ahead the broker suggests these headwinds in office should lead to market rental declines of -30% or more. Asset values are also expected to decline by around -5% until the end of 2022.
Top picks include Charter Hall, Goodman, Stockland and Lendlease. On the other hand, the broker agrees low rates, rising asset values and demand for real estate is driving upside for the fund managers.
Recent transaction activity points to record prices and higher asset value and this should drive further increases to performance fees. Despite Charter Hall and Goodman trading at historical highs Citi still finds potential for outperformance.
Pre-sales in residential have risen, providing evidence for a short-term earnings boost and the broker envisages scope for FY22 guidance, where it exists, to prove conservative.
UBS notes those A-REITs that outperformed during the recent reporting season include Centuria Capital ((CNI)), Scentre Group ((SCG)) and Ingenia Communities ((INA)) while those underperforming were BWP Trust ((BWP)), Goodman and Charter Hall Retail ((CQR)).