Property trusts may not be at these discounts to assets for much longer

Most of the market’s best-known REITs are trading below their net asset valuations – it does not happen very often.

With virtually a whole sector trading at a sizeable discount, there are numerous ­opportunities out there for the ­patient, forward-looking investor. Picture: Rohan Kelly

Central bankers around the world are set to lower interest rates, but the exact timing is unknown.

Bond markets will try to anticipate the reductions and rally in advance, lowering bond yields.

Bank shares in Australia have already rallied hard and many suggest today’s prices are unwarranted, given weak fundamentals that dominate the sector.

Apart from bank stocks, the source for regular investment income among investors are property trusts, or A-REITs listed on the ASX. REITs are still offering securities trading at a discount to underlying asset values. So, no need to guess why the local sector is on many an investor’s radar.

In February, REITs as a group outperformed the broader market by 4.3 per cent (returning 5.1 per cent against 0.8 per cent for the ASX 200). The devil is in the detail, as the sector is operating under a cloud of ongoing threats, headwinds, (valuation) traps and challenges.

Bond yields might be below last year’s peak, but they are still high and for many REITs the costs of carrying debt is restricting how much can be paid to shareholders.

Many REITs are effectively ex-growth, for the period ahead, as price inflation, devaluing assets and polarising consumer spending offer additional negatives.

In some cases, asset sales are the only way out of the situation.

One additional factor to keep in mind is that, while your average REIT is trading at a discount to implied asset valuations, the general consensus is there will be further asset devaluations in the year ahead, though maybe not as large as is currently priced in.

After the February results season, which offered positive surprises, led by sector leader Goodman Group, as well as predictable disappointments, it’s worth taking a look at the updated sector assessments by those analysts whose daily job revolves around REITs.

When it comes to “valuing” the sector, analysts at Jarden investment bank believe it is imperative investors take into account the still mounting pressure on cash flows, be it through incentives offered (to attract tenants), capex, or other items that are not included in reported funds from operations (FFO) data.

Jarden’s sector favourites post-February are National Storage, Vicinity Centres, Scentre Group and Ingenia Communities Group, which are all rated a buy, and Goodman, Charter Hall, Region Group, Charter Hall Retail REIT, Arena REIT, HomeCo Daily Needs REIT, Centuria Industrial REIT, Stockland and Lifestyle Communities, which are rated overweight.

The team at Jarden is not so keen on Mirvac, Centuria Capital, Centuria Office REIT, Charter Hall Social Infrastructure REIT, Charter Hall Long WALE REIT, GPT, Dexus, or Bunnings Warehouse Trust.

Analysts at Morgan Stanley ­remain concerned about heavy capex plans for Dexus and Vicinity Centres, which raises balance sheet risks for Dexus in particular.

Most preferred exposures are Goodman, Stockland and Charter Hall. Two other overweight-rated REITs are Scentre and Centuria Capital.

In terms of asset devaluations, Morgan Stanley sees another round of devaluations happening by August.

Only then, the analysts suggest, will investors be able to assume the worst might have passed for the sector (in the rate rise cycle).

Macquarie prefers Charter Hall, Mirvac and Goodman among the large caps, and Qualitas and Centuria Industrial REIT among the smaller players.

Industrial remains this broker’s most preferred sub-sector, while office remains least preferred.

Macquarie does not like Vicinity Centres, Scentre or Charter Hall Long WALE REIT.

Macquarie says most REITs have limited debt expiries over the coming one to two years, with a large contingent expiring in 2026.

This noticeable step-up in debt expiries applies in particular to Scentre, Dexus, Vicinity Centres, HomeCo Daily Needs REIT, Mirvac and Goodman.

Nonetheless, the average debt maturity for the sector has declined to 3.7 years. In June last year, the average was 3.9 years. Twelve months earlier, the comparative average stood at 4.6 years.

If one were to assume more negative scenarios ahead for the sector, Macquarie believes Mirvac, Dexus, Vicinity Centres and HomeCo Daily Needs REIT would be most at risk from a medium-term liquidity perspective.

Analysts at Citi say Australia continues to benefit at the macro level from high population growth, driven by immigration.

This has a positive follow-through impact on retail activity and assets, housing prices and rental growth, demand for self-storage space, as well as logistics services.

The February results season highlighted artificial intelligence and strong demand for data centres as additional positives ­providing strong incentives for further investments.

Echoing the cautiously optimistic mood that also dominated Citi’s 29th annual Global Property CEO Conference, the broker’s coverage of A-REITs includes many buy ratings and only one sell, carried by BWP Trust as the share price trades above the broker’s $3.40 price target.

Buy ratings are for GPT, Stockland, Charter Hall Retail REIT, Abacus, Ingenia Communities, Goodman, Charter Hall, Growthpoint Properties Australia, National Storage, Qualitas Real Estate Income Fund and Abacus Storage King.

Of course, investors should keep in mind that a cheap-looking share price is not by definition an excellent long-term investment, but with a whole sector (except for Goodman) trading at a sizeable discount, there are numerous ­opportunities out there for the ­patient, forward-looking investor.

Rudi Filapek-Vandyck is editor of the stock research service www.finarena.com