Another positive return for A-REITs in 2013 after strong 2012: Mark Wist
The A-REIT sector showed a total return of 33% for 2012, outperforming shares, which returned 20% over the same period.
Drivers of this outperformance included reducing debt servicing costs and an improved capital position, strong capital inflows to the sector and a surge in merger and acquisition activity in the second half of the year.
An average sector earnings yield of 7.2% and an average payout ratio of approximately 81% underline the strong income proposition offered by A-REITs.
Debt servicing costs for the larger A-REITs have reduced by 1% over the past year to approximately 5.5%. This will benefit those A-REITs with interest rate hedges expiring this year and those who can fund earnings accretive property acquisitions with debt.
With A-REIT sector distribution yields around 6% and Australian 10 year government bond yields currently around 3.5%, a significant yield premium of 2.5% exists.
Share buy backs had been a common capital management strategy in the first half of 2012 as A-REIT prices traded at a significant discount to their asset backing. However, in the final quarter of 2012, over $600 million of equity was raised including $400 million by Goodman Group and $100 million by Charter Hall Retail.
In addition, both the 360 Capital Industrial Fund and the Shopping Centres Australasia Property Group (the Woolworths property offshoot), which raised $472 million, were listed as A-REITs. Excluding Westfield Group, the A-REIT sector discount to asset backing has closed from 10% this time last year to a 5% premium.
At the end of 2012, GPT made an unsolicited bid to acquire the non-residential property and corporate assets of Australand. While the bid was rejected, the principal shareholders of Australand have indicated their willingness to exit their investment.
Mirvac has also expressed interest in acquiring Australand. It is anticipated that Australand will be acquired this year. The benefits of increased scale will a driver of corporate activity. Smaller A-REITs without the capacity to grow their balance sheets without external capital are likely to be among the targets.
While rent growth is likely to be subdued in 2013, development and redevelopment pipelines are likely to boost earnings growth. Continued low interest rates, the prospect of corporate activity, and the relatively high yield from A-REITs compared to equities and fixed interest investments are expected to be factors contributing to another positive total return in 2013.
Mark Wist is senior asset consultant at Atchison Consultants.
