REITs deliver strong results in February reporting season

Australian listed property companies with a focus on commercial property delivered solid results in the February reporting season while corporate activity and property transactions were high on the agenda.

Property companies have outperformed the broader share market. The S&P/ASX 200 A-REIT index, which tracks Australian listed real estate investment trusts, is up 30% over the year to the end of February compared with 10% for the ASX 200 index.

Companies with exposure to retail property performed well in the latest reporting season as sales growth and asset revaluations lifted profits.

While not specifically a property company, homeware giant Harvey Norman has a sizeable holding of retail property. It said improving consumer confidence and growth in equity and housing markets benefited its results while its own property assets increased in value.

The company reported a first-half net profit of $142 million, up 27.4%. Sales revenue increased 8% to $839.3 million, while the value of its property assets rose to $2.31 billion from $2.27 billion.

Fellow retailer Wesfarmers reported that Coles’ revenue increased 2.8%, while homewares sales, including Bunnings, were up 11.8%. Sales from Woolworths’ home improvements business were also up, although overall the grocery giant reported weaker sales results.

Declining sales growth for Woolworths is a risk for listed property companies such as SCA Property Group, Charter Hall Retail REIT and Federation Property, which own mostly neighbourhood and smaller shopping centres with those retailers as anchor tenants. However, each of those groups reported solid results and increasing property values.

Gains in asset values was a common theme for retail-focused Australian real estate investment trusts. There was also a large number of shopping centre sales through the period with commercial property agent Savills reporting $5.7 billion worth of retail property changed hands in 2014, down from $7.4 billion in 2013, but up compared with the five-year average.

Corporate activity was also a feature of the most recent reporting season.

Novion Property Group is in merger talks with Federation Property while Scentre Group formed in mid-2014 out of the restructure of the Westfield Group. All three companies reported higher asset valuations and positive results.

Westfield Corporation, which also formed out of Westfield Group and invests in shopping centres in the US and UK, reported half-year profit increased 20% to US$582.3 million.

“Retail has performed strongly in recent years, but rental growth is expected to moderate going forward because of pressures of sales leakage to online retailers, consumer deleveraging and declining sales productivity,” Morningstar analysts said.

Industrial property is seen as one of the beneficiaries of increasing online sales as warehouse and logistics-focused property gains importance. There has been strong growth in investor demand for industrial properties over the past 12 months, particularly top quality properties, CBRE’s 2014 Q4 Industrial MarketView report showed.

Investor demand for office property has also been strong although tenant demand, particularly in Perth and Brisbane has been weaker as a result of the downturn in mining investment. 

In total $24 billion worth of commercial property transacted in 2014, Savills’ research shows.

Growthpoint Properties Australia, which invests in office and industrial property, noted in its interim report that there has been a “disconnect between weaker occupier demand and high investment demand” for Australian commercial property over the past two years.

“This appears to be the result of mixed economic conditions coupled with historically low interest rates and bond yields” Growthpoint noted.

“In the office sector, weak occupier demand has resulted in high levels of vacancies and incentirves across Australia. Within the industrial market, occupier demand was patchy over 2014 with the gross take-up being substantially below the 10 year average and at its lowest level since 2009.

“Office market leasing conditions are expected to remain difficult in 2015 … Moderate occupier demand for industrial space is being experienced. Competition for well leased office and industrial properties will continue as the demand for investment outweighs the supply of property coming to market for sale with the strong demand from offshore investors, as well as domestic institutional and A-REIT investors expected.”

Growthpoint reported half-year profit up 123.4% from the previous corresponding period to $141.8 million. Its properties were revalued 4.5% higher in the first half.

Analysts at CLSA reportedly expect B-grade office, industrial and regional retail asset classes to outperform in 2015, and anticipate further mergers and acquisitions from the likes of Mirvac, Cromwell, Dexus, GPT and Charter Hall. They believe stocks in the sector are expensive but estimate an 11% return in 2015 if bond rates stay low.