Steer clear of A-REITs, says investment manager

Investment manager Implemented Portfolios says Australia’s listed property trusts are not trading at a discount to net tangible assets and is steering clear of the asset class.

In its latest update, Implemented Portfolio’s asset allocation and investment committee says A-REITs are “fully priced at best, if not expensive”.

The committee says although A-REIT values are returning to more reasonable levels, “current upside potential is not sufficiently compelling, and the local sector is dominated by retail which is facing a very difficult environment”.

As a result, the fund manager is maintaining its “zero allocation to listed property” across all of its individually managed accounts.

Shopping centre group Westfield and its spin-off Westfield Retail Trust make up more than a third of the total A-REITS market, with a combined market capitalisation of about $30 billion.

Other retail-focused A-REITS include CFS Retail Trust ($5.5 billion) and Charter Hall Retail ($1.1 billion).

This view is somewhat at odds with the assessment of A-REITs made by other fund managers.

Writing for Property Observer, Martin Lamb, head of property in Asia-Pacific for Russell Investments, says a number of factors working are currently in favour of A-REITs investment, including “average modest discount of share prices from net tangible assets”.

Other positive influences include the structural changes to A-REITs post-GFC (gearing ratios down to 30%), the stable outlook for Australian property fundamentals and the historically high component of income to overall return.

“The combination of these elements means that A-REIT shares now appear to offer a reasonable risk-return trade-off,” Lamb says.

David Curtis, portfolio manager at A-REITs specialist Reliance Investment, says investors can currently buy any number of A-REITs from big, well-known companies (Westfield, GBPT, Dexus, etc) at a reasonable discount to underlying asset backing.

“This gives investors a little bit of comfort because they’re buying something they know is worth ‘X’ at only 0.8 of ‘X’,” he says.

Implemented Portfolios asset allocation committee member Jon Reilly says its decisions this quarter reflect a cautious outlook.

“The remainder of the year is likely to be characterised by ongoing sluggish economic growth in the developed world which has the potential to be exacerbated by political and regulatory responses to debt problems in Europe and budget and debt ceiling negotiations in the US.

"As a result, we have positioned the portfolios defensively but will add to equities allocations when valuations become more attractive. We believe this is the best approach to ensure investors avoid disasters and protect their capital.”