It's time to sell REITs: Research analyst

Zoe FieldingMarch 10, 20150 min read

Research analyst PIR is advising clients to sell their holdings of Australian real estate investment trusts after prices for the companies rallied and many in the sector performed well in the latest reporting season.

Listed Australian property companies delivered strong results in the latest reporting season. The S&P/ASX 200 A-REIT index, which tracks stocks in the sector, gained 30% over the year to the end of February compared with a rise of 10% for the broader S&P/ASX 200 index.

“The A-REIT sector has rallied hard, and the listed market is pricing in strong earnings growth, strong NTA [net tangible asset] growth, or (the simplest and most probable explanation, given the rally in other “yield” stocks such as banks) very low interest rates,” PIR analysts noted.

“The risk is that the market may rotate out of yield stocks, prompting a sell-off in REITs. Take profits now and re-enter at a better level,” they advised.

REITs are considered to be yield stocks because they typically pay stable streams dividends to shareholders from rent collected on properties.

Charter Hall Retail REIT, which reported its half-year results on 19 February, paid out 13.7 cents per share on earnings of 14.87 cents a share for the first half. It forecast it would achieve full-year operating earnings per share of 29.6 to 30 cents, of which 90% to 95% would be paid to investors.

PIR recommended clients reduce their holdings of Charter Hall Retail REIT, commenting that at $4.53 at the time of the report, the stock was “getting pricey”.

Other analysts have different views on the stock and the REIT sector more generally. According to opinions tracked on Yahoo Finance, one analyst says sell Charter Hall Retail REIT and seven expect it to underperform but four recommend holding.

Commentators, including Atchison Consultants analyst Ming Niu, believes REITs will continue their strong performance, perhaps with marginal price falls. 

PIR analysts are also recommending clients reduce their holdings of Arena REIT, which invests in social infrastructure sectors such as childcare, healthcare, education and government tenanted facilities. Arena said in its half-year results that it would deliver distributions of 10 cents per share for the full financial year.

PIR’s recommendation stands apart from other analysts’ assessments with two of those whose opinions are listed on Yahoo Finance saying hold and one saying buy.

Folkestone Education Trust is another stock PIR is recommending clients reduce. The company trades on a forecast price earnings ratio of above 17 times, against a P/E ratio of 15.7 times for the wider sector. The analysts noted the stock is trading at a premium of about 30% to its NTA and its distribution per share yield is about 6%.

“The listed market is pricing in strong earnings growth, strong NTA growth and yield compression, or – more likely, given the rally in other “yield” stocks such as banks – very low interest rates,” the analysts noted.

Zoe Fielding

I am a freelance journalist and editor with more than 15 years experience specialising in personal finance, property, financial services and financial technology. A skilled writer and researcher, I have extensive experience producing high quality content for corporate and media clients. I am used to working to tight deadlines and tailoring the pieces I produce to suit a variety of audiences and formats.
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