A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER 2013

Transcription

1 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER 2013

2 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER 2013 CONTENTS

3 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER SECTOR PERFORMANCE The majority of REITs performed strongly over the six months, even though some larger REITs recorded negative returns. Interest in the sector remains high as shown by strong capital raising and IPO activity. 5.8% MEDIAN RETURN ALL SURVEYED REITs 1.5% S&P/ASX 200 PROPERTY ACCUMULATION INDEX 1.8% MEDIAN RETURN LARGEST 10 REITs 5.1% MEDIAN RETURN SMALLEST 10 REITs 9.8% WESTFIELD GROUP 7.6% GPT GROUP The six months to 31 December 2013 saw A-REITs continue to perform strongly, particularly smaller and medium-sized trusts. The period was characterized by a strong level of capital raising activity, including four initial public offerings. The S&P/ASX 200 Property Accumulation Index (Property Index), comprising the top 17 REITs, delivered a negative 1.5% return for the period. This was despite 33 of the 41 entities surveyed recording positive returns. The Property Index return was weighed down by the performance of index leader Westfield Group (negative 9.8% return) as concerns over its proposed restructuring initiatives and exposure to the retail sector impacted its share price performance. GPT Group also recorded a negative 7.6% return over the period. The Property Index as a whole substantially underperformed the broader market (the S&P/ASX 200 Accumulation Index, which recorded a positive 14% return). However, the weakness in the performance among the larger REITs was not replicated by the smaller REITs. The median return for the smallest 10 REITs was 5.1%, while the median return for the largest 10 REITs was 1.8%. The median return among all surveyed REITs was 5.8%. There were also some particularly strong performances by REITs that sit outside the Property Index, including Ingenia Communities Group (60.3%) and Arena REIT (20.5%). In addition, property groups with overseas properties significantly outperformed Australian property owners as a result of the decline in the Australian dollar. For example, the Multiplex European Property Fund increased the value of its property portfolio by 9% ($28 million), increasing NTA from 2 cents per unit to 5 cents per unit. This was due to the appreciation of the euro against the Australian dollar. All Ordinaries vs Property Index ASX ALL ORDINARIES ASX PROPERTY 200 INDEX JUL 13 AUG 13 SEP 13 OCT 13 NOV 13 DEC 13

4 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER DISTRIBUTION YIELD REITs continue to deliver sustainable distributions at a very competitive yield relative to other investment opportunities. DISTRIBUTION YIELD 5.8% AT 31 DECEMBER % AT 30 JUNE 2013 Despite a small reduction in distribution yield, from 6.2% in FY13 to 5.8%, distributions have generally remained stable. REITs across the sector are generally focused on delivering sustainable distributions, which provide an attractive yield in comparison with other investment opportunities. Shopping Centres Australasia Property Group recorded one of the highest annualised distribution yields. This was supported by increasing rental income as a result of reduced specialty vacancies, new casual mall leasing revenues and the commencement of turnover rent from a number of major anchor tenants. 360 Capital Industrial Fund saw its distribution per unit grow by 3.3% over the preceding period. Strong operating performance for the period was driven by a solid performance from the existing portfolio, characterised by high occupancy, long-term leases and a manageable expiry profile with all major near-term expiries having been addressed. A small number of REITs continue not to pay any dividends. For example, Mirvac Industrial Trust cited requirements to maintain a strong balance sheet and ensure sufficient funding capacity to undertake leasing and base-building capital expenditures and value-add projects. Distribution Yield 8% 7% 6% 5% 4% 3% 2% 1% 0% DEC 09 JUN 10 DEC 09 JUN 11 DEC 11 JUN 12 DEC 12 JUN 13 DEC 13

5 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER GEARING Gearing remains conservative despite a small increase in median gearing levels. MEDIAN GEARING - ALL REITS 31% MEDIAN GEARING - TOP 10 BY MARKET CAP 25% MEDIAN GEARING - BOTTOM 10 BY MARKET CAP 50% There has been a continued focus on minimising the costs of debt, with REITs generally pursuing conservative gearing policies despite a small increase in median gearing levels. Median gearing across the sector is approximately 31%, increasing by 2% from FY13 levels. The slight increase in gearing can partly be attributed to the current low interestrate environment making debt an attractive source of funding. Dexus Group noted that their takeover of CPA resulted in an increase in gearing of approximately 4%. Despite the small increase in median gearing levels, the major REITs remain committed to conservative gearing. Medium-sized and smaller trusts continue to exhibit higher gearing levels (often with target gearing ranges of 40-50%) than the more conservative larger trusts, which generally range between 20% and 30%. Gearing 60% 50% 40% 30% 20% 10% 0% DEC 09 JUN 10 DEC 09 JUN 11 DEC 11 JUN 12 DEC 12 JUN 13 DEC 13

6 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER PREMIUM/DISCOUNT TO NTA Some strong performances in the share prices of smaller and mid-sized REITs have driven prices above NTA for the first time since the global financial crisis. PREMIUM/DISCOUNT TO NTA 2% PREMIUM AT 31 DECEMBER % DISCOUNT AT 30 JUNE 2013 The sector s recovery post GFC is most clearly illustrated by the improvement in the unit prices of A-REITs relative to their asset backing. Prices were trading at a median 2% premium to NTA at 31 December 2013, compared with a 5% discount at 30 June This is the first time since the GFC that the A-REIT sector has traded at a premium to NTA. While much of the increase in unit prices relative to asset backing between July 2012 and June 2013 was driven by the large A-REITs, the increase experienced during the six months to 31 December 2013 was a result of some strong performances in the unit prices of smaller and medium-sized REITs. Premium/Discount to NTA 0% DEC 09 JUN 10 DEC 09 JUN 11 DEC 11 JUN 12 DEC 12 JUN 13 DEC 13

7 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER PROPERTY REVALUATIONS Revaluation gains among quality assets and in niche markets have offset falls among some lower-quality retail and office assets. ASSET VALUATIONS 0.25% Property valuations experienced contrasting results. Small increases in the valuation of quality assets with long leases were partly offset by declines in the valuation of assets with vacancies and short-term expiry profiles, particularly in the retail sector. This is consistent with the preference following the GFC for low-volatility investments. Overall there was a 0.25% increase in asset valuations over the six months under review. Strong gains were experienced by industrial portfolio valuations, driven by leasing demand. 360 Capital Industrial Fund noted that this strong investment demand for industrial assets is forecast to continue, which should see improved valuation metrics in the first six months of Australian Education Trust noted that 51 properties were independently valued and increased by an average of 6.3%, with strong growth in NSW and New Zealand driven by both yield compression and annual rental growth. Property Revaluations 2% 1.5% 1%.5% DEC 09 JUN 10 DEC 09 JUN 11 DEC 11 JUN 12 DEC 12 JUN 13 DEC 13

8 A-REIT SECTOR UPDATE FOR THE SIX MONTHS TO 31 DECEMBER OUTLOOK Despite challenges facing the sector, the outlook remains positive with the sector returning 2% in the three months to 31 March In our 2013 A-REIT Survey, we noted three key challenges facing the sector: 1. Sourcing quality assets With many trusts looking at property acquisitions to grow earnings and scale, it will become harder to find quality assets at the right price. Bidding competition from overseas investors will also increase the difficulty in securing acquisitions. 2. Weakness in leasing There are still signs that the rental market remains weak, particularly for CBD office properties, where vacancy rates remain above long-term averages. 3. Ongoing economic uncertainty With some sectors of the economy still weak, and the continued sense that neither business nor consumer confidence have fully returned, valuation improvements are likely to be restricted over the near-term. While these three concerns still remain current, there are signs that domestic conditions are beginning to respond to increased business confidence, with a broad-based recovery boosted by a falling Australian dollar. Despite retail conditions remaining challenging, improving household wealth should result in improvements in discretionary spending in key metropolitan areas. While vacancy rates have increased across most CBD office markets, office supply remains below historical averages in Melbourne and Sydney. Despite the fall in the Property Index in the six months to 31 December 2013, sentiment towards the sector remains strong. The recent bidding competition for the Commonwealth Property Office Fund between Dexus Property Group and GPT Group demonstrates the interest in high-quality office assets. A relatively buoyant pipeline of potential IPOs suggests that the positive momentum in IPO activity is set to continue. The Property Index returned 2% in the three months to 31 March (versus a 0.8% gain by the ASX 200 benchmark index).

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