Value Emerging In Oz REIT Sector

This story features MIRVAC GROUP, and other companies. For more info SHARE ANALYSIS: MGR

By Chris Shaw

Australian REITs underperformed the broader market in November, delivering a total return of minus 2.1% against a broader market return of minus 1.1%. JP Morgan ascribes this underperformance at least partly to $2.0 billion in new equity raisings in the period, which was the largest amount of new equity raised in a month since May of 2009.

This underperformance is improving the value on offer, as JP Morgan estimates the sector is trading at a discount to the broker's net present value estimate of 10.7%. Credit Suisse estimates the discount currently stands at 12.4%, which compares to a 10-year average discount of about 2.0%.

In terms of year-to-date performance, JP Morgan notes industrial REITs have been best with a return of 4.2%, ahead of retail at 1.0%. The worst performers have been the office sector at minus 9.0% and diversifieds at minus 8.3%.

One positive for the sector according to JP Morgan was a pick up in asset acquisitions in November. There were a total of $624 million in acquisitions in the month, the broker noting this is a sharp pick-up in direct market participation given almost two years of no buying activity.

Credit Suisse notes while the REIT sector has underperformed the broader market in recent months, for the two weeks to December 1st the sector outperformed and delivered a gain of 0.75% against a minus 0.81% return for the market overall.

A key takeaway for the sector according to Credit Suisse is while market perception continues to focus on the impact of a credit crunch, less attention is being paid to what is now a de-leveraged forward earnings outlook.

The other issue in the broker's view is market perception of earnings yield and growth remains a significant impediment to the sector trading up to full value. But Credit Suisse's latest analysis shows the sector has begun to adjust in recent sessions.

The value is there, as Credit Suisse estimates a bottom-up average total shareholder return of 20.8%. Among the stocks it covers, Mirvac ((MGR)) has the highest forecast total shareholder return of 26.9%, while Dexus Property Group ((DXS)) offers a total return of 25.3%. Only Charter Hall Retail ((CQR)) offers a forecast single digit total return at 9.3% on the broker's numbers.

In the sector Credit Suisse rates CFS Retail Property Trust ((CFX)), Mirvac and Dexus as Outperforms, is Neutral on Stockland ((SGP)), GPT ((GPT)), Goodman Group ((GMG)), Commonwealth Property Office Fund ((CPA)), ING Office Fund ((IOF)) and Charter Hall Office ((CQO)), while the broker is at Underperform on Charter Hall Retail.

Citi has a high proportion of Buy ratings across the REIT sector, this positive view reflecting improvements in market conditions and cheaper pricing across the sector.

What also supports Citi's positive view are modest net asset value upgrades following changes to the broker's marginal cap rate assumptions. Cap rate is calculated by dividing the property's net operating income by its purchase price.

With the sector again near the bottom of its recent trading range Citi sees a rebound as likely, noting rallies from similar levels in the more recent past have delivered returns of 4-8% over the span of 2-4 weeks.

Tne issued identified by Citi is a number of Australian REITs such as Charter Hall Office, GPT, Mirvac and Commonwealth Property Office, are forecast to generate low returns on equity. This limits the premium investors will pay for these stocks, so limiting unit prices.

This is reflected in Citi's rankings for the sector, as its Buys are Abacus Property Group ((ABP)), CFS Retail ((CFX)), Charter Hall Retail, Commonwealth Property, Dexus, Goodman Group, ING Office and Stockland.

Citi rates GPT, ING Industrial ((IIF)), Charter Hall Office and Mirvac as Holds and has no Sell ratings in the sector.

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