Retail REITs offer best investment potential: Goldman Sachs

Investors should consider putting their money into retail property trusts, according to post-reporting season analysis by Goldman Sachs REIT analysts Simon Wheatley, Peter Zuk and Andrew MacFarlane. 

In their March monthly REIT outlook, Wheatley, Zuk and McFarlane have picked the Westfield Retail Trust (WRT) as the “best buy idea” and maintained an overall “neutral” outlook on the REIT sector. 

The following chart shows the net operating income growth of WRT and Stockland (SGP) compared to Mirvac (MGR), GPT and the CFS Retail Property Trust (CFX).

Goldman Sachs’ other recommended REIT buys are the diversified trusts Charter Hall (CHC) and Stockland (SGP) and the Goodman Group (GMG) industrial trust.

Although the outlook for retail remains challenging, they note that bankruptcies in the sector for the 2012 calendar year to date have been “next to zero” compared with four major retailer collapses over the same time period last year. 

“By this time in the 2011 calendar year, there had been four major retailers (RedGroup, Ed Harry, Bijoux Accessories and Covers Designs) go into bankruptcy impacting 340 stores in Australia,” the report says. 

“We estimate two-thirds of these stores ultimately closed. By the end of the first quarter of 2011, these store bankruptcies had risen to a substantial 804 stores with the failure of Colorado and Perfume Empire. 

“Contrast this with 2012 calendar year. To date there have been no chain retailers enter bankruptcy with a benign 2011 Christmas trading period and our expectation that we could see some retailer failures. 

“The only two retailers who have stumbled are Sleep City (64 stores) and WOW Audio (15 stores), however neither has any real exposure to shopping centres,” say the Goldman Sachs analysts. 

According to Goldman Sachs shopping centre landlords currently have “negligible exposure to national retailers on any [bankruptcy] watch lists” .

“Other factors which suggest that there remains an apparent equilibrium regarding rent stress include; stable reported arrears; continued positive re-leasing spreads on expiring leases; no meaningful reduction in the tenant retention rate and negligible vacancy,” the report says. 

“Downside risk is very contained in our view. As such the best buying opportunities continue to be in retail REITs and this was reinforced by the reporting season results.” 

Beyond retail, Goldman Sachs says office occupancy levels have remained stable, but says they may have peaked and will soften into the end of 2012 financial year (end of June). 

The investment bank has weaker convictions about the residential outlook as a result of lower lot sales. However it notes that margins have held and there are better contracts on hand than at the end of the previous comparable period. 

“The outlook continues to see management avoiding the higher-end price point and satiating and stimulating demand at the more affordable end of the range,” says Goldman Sachs. 

“The outlook commentary was notably cautious, with fundamentals in NSW reported to be solid, Victoria continuing to moderate, and Queensland still extremely soft although showing some tentative signals.” 

Goldman Sachs is forecasting a 2012 calendar year capital return for the REIT sector of 15.5%, a yield of 6.87% for a total return of 22.4%.