Still Value In Resi And Retail REITs

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– Australian REITs outperformed broader market last week
– Value on offer in residential plays
– Some retail plays attractive even allowing for tough conditions
– Goodman Group offering value

By Chris Shaw

For the week ending July 15th the Australian REIT Index fell 3.8%, which was slight outperformance relative to the broader market. BA Merrill Lynch estimates the sector now trades at an average discount to price targets of 10.5% excluding Westfield Group ((WDC)), so when yields are added in the sector offers an implied total return of 21.2%.

BA-ML has paid particular attention to the residential sector, as this market appears to be softening fast given since September last year house prices have fallen by 3.7%. With consumer sentiment and new finance commitments also down, lower residential growth assumptions now seem appropriate.

Given this view, BA-ML has trimmed earnings per share (EPS) estimates for the residential plays by 1-3% from FY12, which has impacted on price targets for Stockland ((SGP)), Mirvac ((MGR)), Lend Lease ((LLC)), Australand ((ALZ)), FKP Properties ((FKP)) and Peet ((PPC)).

The market weakness appears priced into the sector in BA-ML's view, as share price declines in recent weeks have in some cases been dramatic. Top picks according to BA-ML are Mirvac and Stockland, the two stocks trading at attractive levels relative to both valuations and earnings multiples.

What supports a positive view in both cases according to BA-ML is the expectation of positive growth in FY12, as while sales volumes may be flat the listed developers are likely to gain market share through higher pre-sales and higher lots controlled.

BA-ML rates all the residential plays aside from Australand as Buys, scoring Australand as an Undeperform on relative valuation grounds. By way of comparison, the FNArena database shows Sentiment Indicator readings of 0.8 for FKP and Peet, 0.7 for Mirvac and Lend Lease, 0.6 for Stockland and 0.3 for Australand.

Over at Deutsche Bank the focus has been on downside risk to income for retail portfolios from the weak outlook for the discretionary retail sector. As Deutsche notes, exposure to turnover-based rent is not material.

The risk to retail portfolio incomes is related to the level of rent achievable on renewals and re-leasings, potential declines in occupancy levels and the scope for development returns to fall short of current targets.

To assess this Deutsche has conducted a sensitivity analysis, allowing for a 200-basis point reduction in occupancy across portfolios, rental declines on re-leases of up to 10% and 100-basis point lower than expected development returns.

Under such a scenario Deutsche's earnings estimates for FY13 would fall by between 1.6% for Stockland and 7.1% for Westfield Retail ((WRT)). But even factoring in downside of the magnitude implied in the analysis, Deutsche suggests many of the retail-centred names appear undervalued at current levels.

Deutsche sees relative value in Westfield Retail and CFS Retail ((CFX)) when compared to GPT ((GPT)). Charter Hall Retail ((CQR)) appears inexpensive relative to the sector average, while Westfield Group ((WDC)) is also somewhat cheap relative to sector averages. 

Stockland appears oversold on the back of concerns with respect to residential and retail market conditions, so it joins Westfield Group and Goodman Group ((GMG)) as Deutsche's top picks among Australian REITs.

Westfield Retail and Charter Hall retail are also rated as Buys by Deutsche, while CFS Retail and Abacus Property ((ABP)) are rated as Holds and Dexus ((DXS)) scores a Sell on relative valuation grounds.

Goodman Group has received additional support from Morgan Stanley, who sees the stock as the top pick in the sector. While the stock has delivered relative outperformance of 21% against the Australian REIT sector over the past year, Morgan Stanley still sees 23% upside to its price target.

As well, Morgan Stanley notes Goodman is trading on a 12-month forward earnings multiple of 11.8 times, which implies value when compared to peers. The other positive is Goodman Group offers leverage to global growth in eCommerce retailers such as Amazon.com, something Morgan Stanley suggests is a positive for longer-term growth.

The FNArena database shows a Sentiment Indicator reading for Goodman Group of 0.6.

 
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