There is a fundamental disconnect between A-REIT pricing and valuation

Mark WistAugust 10, 2011

The extraordinary fluctuations in the listed markets over the past seven trading days to August 10 have demonstrated a fundamental disconnect between pricing and underlying valuation.

Despite approximately 85% of underlying A-REIT sector income being underwritten by rental income secured by lease contract (not subject to variable corporate profitability), the sector as represented by the S&P/ASX 200 A-REIT Index declined 8.9% over that period since August 2, while trading volume increased 133%.

Over that same period, the broader equities market as represented by the S&P ASX 200 Index lost 6.6% on increased turnover of 89%. However before yesterday, it was the A-REIT sector that had withstood the stormy weather better (-7.2% compared with -9%), but a preliminary final financial year report from market giant Stockland contributed to the relative underperformance for the day (down 3.6%).

While net profit and earnings were up significantly, it was the forecast of a flat 2012 year for earnings which disturbed A-REIT market sentiment. 

This substantial change in market price has a consequent impact on the sector yield. The sector yield at 2nd August was 6.73 percent while seven trading days later, that yield was at 7.33 percent. 

Much now hinges on the rest of the reporting season for guidance on A-REIT pricing, with a particular focus on the significant retail trusts as a bellwether for 2012 earnings.

Mark Wist is senior asset consultant at Atchison Consultants

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