Solid prospects for A-REITs in 2012
While the total return for the A-REIT sector was -1.6% in the 2011 calendar year, it outperformed the broader Australian equity market, which recorded a -11% return. A-REITs are now regaining some of the defensive characteristics they traditionally exhibit.
Renewed optimism is occurring. It is driven by repaired and relatively healthy balance sheets. Sector gearing now averages approximately 28%, down from 37% in 2006. As current debt facilities expire over the course of this year, resetting these facilities at the lower interest rates will reduce interest payments. This will improve net earnings, just the same as any household budget with a mortgage.
A-REITs trade at a near 10% discount to their net tangible assets (NTA). Some A-REIT managers such as Stockland and GPT are undertaking share buy-back schemes in order to boost their NTA. These buy-backs are being funded by targeted property asset sales at or above NTA. The net proceeds are then used to buy back their own discounted shares.
Mergers and acquisitions is a theme that will feature this year. Charter Hall Office Trust will start the corporate activity, with a unit holder vote expected to ratify the privatisation of the trust in March.
The persistent discount between market prices and NTA is encouraging this corporate activity. This supported by the opportunities available to acquire institutional grade real estate at a discount. An additional benefit is the stamp duty saving over acquiring the assets outright.
Reduced interest rates, prevailing discounts to NTA and repaired balance sheets provide solid prospects for A-REITs in 2012.
Mark Wist is senior asset consultant at Atchison Consultants.
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