REITs to set the pace as economy heads towards reopening

Listed property companies are well-positioned to benefit from the reopening trade and are also turning their hands to funds management.

Big retail landlords indicated they would also benefit from shops reopening around Christmas, although much will hinge on when lockdowns in Sydney and Melbourne lift. Picture: NCA NewsWire/John Gass

Listed property companies are well-positioned to benefit from the reopening trade and are also turning their hands to funds management after a surprisingly upbeat reporting season from big retail landlords.

Major companies are looking to take a leaf out of the book of sector stars, industrial titan Goodman Group and property fund giant Charter Hall, but not all will succeed in diversifying from their traditional operations.

Big retail landlords indicated they would also benefit from shops reopening around Christmas, although much will hinge on when lockdowns in Sydney and Melbourne lift.

Macquarie analysts Stuart McLean, Caleb Wheatley and Melissa Lourens said there had been a change in rhetoric from the REIT sector, with many groups looking to grow earnings via alternative means.

They put this down to lower returns from owning properties. Some have core businesses in offices and retail that are under pressure from structural shifts.

Dexus is shaking up its office portfolio with a series of sales and Stockland is looking to revamp by pushing into new areas like land lease. Vicinity Centres has also flagged a push into mixed-use developments.

The move into funds was emphasised by almost all big players, with Dexus already snapping up the APN platform and taking control of an AMP Capital fund.

Others flagging funds ambitions include Vicinity, Mirvac, Stockland, GPT, Growthpoint, SCA Property and the Brett Blundy-backed Aventus, as well as developer Lendlease and the emerging HomeCo.

“Listed real estate funds managers trade on attractive price to earnings ratios driven by a strong track record and groups looking to attract similar multiples will need to demonstrate earnings and funds growth,” they said.

The Macquarie analysts said the current slowdown phase of the economic cycle was positive for the REITs, but an increase in yields resulting from central bank tapering remained a risk.

“Looking through this, we continue to believe earnings growth for Charter Hall and Goodman Group will support our outperform recommendation for both names with guidance for both names as conservative,” they said.

The Macquarie team said that income from large malls was surprisingly strong but they preferred convenience landlords. They cautioned that beyond the ‘‘reopening’’ theme, the medium-term outlook remains challenged.

Jarden Australia analysts Lou Pirenc and Andrew MacFarlane argue that the reopening should see strong growth for retail REITs. “We appreciate the structural pressures from online and cost inflation but believe the market is underestimating the growth and rerating potential from gross collection levels to return to pre-Covid levels,” they said.

They upgraded Westfield owner Scentre and GPT on the back of the retail recovery and said funds management growth was likely to continue.

“We continue to be supportive of the dedicated fund managers, as ongoing assets under management growth, strong demand from co-investors, fund performance and investment capacity should drive superior growth,” they said.

“While many other REITs are trying to do more with funds management, we believe history has shown not many are able to show the consistent returns and growth required,” they said.

JPMorgan analysts Richard Jones and Solomon Zhang said REITs outperformed, boosted by a record 7 per cent net tangible assets growth in the half. “Overall, we modestly lowered our earnings forecasts, mainly in the short term for new retail rent assistance from the current restrictions,” they said.