Safe-haven real estate trusts feel investor pressure

Sholto Maconochie, head of Australian real estate at CLSA, says he expects A-REITs to outperform the general equities market this year, with a total return of 5 to 10 per cent.

He said current “lower for longer” sentiment was expected to remain in 2019, with the Australian 10-year bond rate to remain in the 2 to 2.5 per cent range and the cash rate to be held at 1.5 per cent, with risk of a cut from weak consumer sentiment.

In the past week, amid trade tensions between the United States and China and the usual uncertainty caused by a pending federal election, the S&P/ASX 300 A-REIT Accumulation Index has held its own, with a few marginal dips.

According to Peter Zuk, senior analyst at Shaw & Partners, A-REITs outperformed the broader ASX 200 in March, up 6.03 per cent versus a rise of 0.19 per cent, and also outperformed other major global REIT indices in the month.

But in April the S&P/ASX 300 A-REIT Accumulation Index returned negative-2.3 per cent for the month, underperforming the Australian equities market by 4.8 per cent.

Mr Zuk said there was a mixed bag of performance, with even retail-exposed A-REITs finding some investor support.

“The sector is looking fully priced, with a forecast total shareholder return of 0.7 per cent, including a 4.7 per cent distribution per securities yield, implying expectations of negative capital returns,” Mr Zuk said. “That said, the US and Australia yield curves shifted lower in the month and continue to
show market expectations of shorter-term interest rate cuts.”

Mr Zuk said, against this backdrop and market concern about a slowdown in global growth, he expected REITs would continue to be relatively well supported.

Managers at the Charter Hall Maxim Property Securities Fund said market fundamentals continued to point to a strong environment for office and logistics.

“In contrast, the growth in online retail is proving challenging for discretionary retail store owners, while there has been a rapid deterioration in housing sentiment, particularly in NSW and Victoria, over the past six months,” the fund’s latest report says.

According to JPMorgan’s A-REIT analysts, discussions with senior industry participants in recent weeks suggest a more supportive interest rate outlook has given some investors reason to consider reducing their return hurdles.

“All else equal, we would expect any material reduction in cost of capital, unless offset by more conservative cash-flow assumptions, to result in higher asset values,” the analysts said.

Moody’s Investors Service says most A-REITs reported credit-neutral to credit-negative results for the six months to the end of December 2018.

“The operating environment for the retail and residential sectors continues to deteriorate across Australia, while the office and industrial segments remained supportive, particularly in Sydney and Melbourne,” said Matthew Moore, a Moody’s vice-president and senior credit officer.

Yuriy Obukh, a Moody’s analyst, said: “Financial leverage continues to rise, reflecting debt-funded development spending and acquisitions. While gearing remained flat, it will increase as the asset appreciation cycle peaks and debt levels increase. Interest coverage has deteriorated slightly, reflecting higher debt, but should improve as rates remain low.”

Carolyn Cummins is Commercial Property Editor for The Sydney Morning Herald.

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