Listed property trusts in acquisition mode: Ken Atchison
After an extended period of little acquisition, listed property trusts in Australia have commenced buying real estate on terms which will enhance earnings yields.
In the year to April 2013, REITs have achieved a return of 34%. This strong performance has reduced the cost of equity capital. Prospective listed property earning yields have fallen from 8.4% to 6.9% in the past year. Over the same time interest rates have been reduced. Official interest rates have fallen from 4.25% to 3.0%. Interest rates on corporate debt have been reduced by 1.6% from 5.6% to 4.0%.
Capitalisation rates or yields on property assets in contrast have barely moved. Weighted average cap rates have been stable at 7.4% for all property over the past year. Earnings yields, RBA cash rates, corporate bond yields and cap rates over the past five years are shown in the following table.
In 2009 earnings yields were well above cap rates. Now they are lower than cap rates so that acquisition of property at current yields provide higher earnings for REITs. This will occur whether funded by cash, new equity capital or new debt capital.
Initial acquisitions which have been made include:
Westfield redevelopment at Mt Gravatt in Brisbane Dexus acquiring an office building in Brisbane
Commonwealth property increasing holding in a Sydney office building
Charter Hall in due diligence on a Perth office property purchase
Mirvac considering an office portfolio purchase
The difficulty faced by the listed property trusts is competition from international investors.
Ken Atchison is managing director of Atchison Consultants.
