Australia | Sep 06 2012
– More A-REIT updates post reporting season
– UBS prefers retail sector to office and residential exposures
– Preferred exposures updated
– JP Morgan also reviews its retail preferences
By Chris Shaw
Following the recent Australian real estate investment trust (REIT) reporting season brokers have updated their views and preferences in the sector (See: REIT Preferences Post Reporting Season), with UBS the latest to undertake such an analysis.
For UBS the result season delivered a solid set of results from A-REITs, with earnings growth of 3% and distribution growth of 5% both in line with expectations. With low interest rates providing something of a buffer, UBS has left forecasts for FY13 largely unchanged post the results.
What has changed for the better is valuations, as UBS has lifted valuations across the sector by 2.5%. The increases reflect rolling forward of net asset values, slightly tighter cap rates and some reductions in overheads.
UBS noticed some key themes to emerge in the various REIT sectors, for retail this being the fact regional shopping centres underperformed sub-regionals. The sub-regionals and convenience stores reported both higher net operating income growth and stronger like-for-like growth during the period.
UBS attributes this to a deterioration in the strength of the regional department store's anchor and the fact regional shopping centres lost market share in the discount department store and supermarket categories.
What could address this decline in coming years is international retailers acting as additional anchors in regional centres. UBS suggests such an outcome would boost market share, foot traffic and net operating income for the regional centres relative to the sub-regional centres. Going forward, UBS continues to prefer regional over sub-regional centres for the medium-term.
In the office sector UBS notes there are higher incentives being offered for a longer period of time, while payout ratios are likely to remain under pressure. As well, UBS points out all office REITs remain in acquisition mode, reflecting the availability of some balance sheet capacity.
Among residential plays UBS sees little sign of improvement in conditions, while companies in the sector are moving to break interest rate hedges rather than to consider buybacks as the tool of choice for boosting returns to unitholders.
In summary, UBS continues to prefer retail over office and residential exposures, in part because any stimulus is likely to prove to be more supportive for the retail sector and transactions in the sector remain supportive of current book values.
Key picks for the broker remain Westfield Retail Trust ((WRT)) on valuation grounds, Centro Retail ((CRF)) for a strong earnings growth outlook, Westfield Group ((WDC)) given a buyback while waiting for development starts should be supportive and Commonwealth Property Office ((CPA)) due to expected earnings upgrades from FY13. Among the small caps UBS has Charter Hall Group ((CHC)) as its best pick.
Sentiment Indicator readings for the stocks according to the FNArena database stand at 0.6 for Charter Hall Group, 0.1 for Westfield Retail and Westfield Group, 0.0 for Centro Retail and minus 0.7 for Commonwealth Property Office.
JP Morgan has followed up its review of REIT earnings results by further reviewing performance of retail REITs post a profit season that showed no major changes to the major retail trend of subdued sales growth.
Results offered some evidence of a moderation in rental growth, which JP Morgan attributes to re-leasing spreads turning negative. This trend should continue, as JP Morgan is expecting a 5% reduction in specialty rents on renewals for all lease expiries over the next two years.
This is not expected to have any significant impact on occupancy levels, while the broker's forecast is for net operating income to fall from 3.3% in FY12 to between 2.5-3.0% over the next 18 months.
Asset values among retail REITs remain stable, JP Morgan noting prime retail assets continue to attract prices that are supportive of book value for the assets. Vacancies remain a non-issue as supply remains at below trend levels and cap rates remain stable.
In terms of preferences among retail landlords, JP Morgan remains overweight on Westfield Retail, GPT ((GPT)), Stockland ((SGP)), Mirvac ((MGR)) and Carindale Property ((CDP)). JP Morgan rates CFS Retail ((CFX)) as Neutral and is Underweight on Westfield Group, Centro Retail, Charter Hall Retail ((CQR)) and BWP Trust ((BWP)).
JP Morgan suggests both the Westfield Retail and Carindale Property share prices imply the greatest move in cap rates going forward, while there is some cap rate compression priced into both Charter Hall Retail and BWP.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.