Less risky A-REITs outperform the share market

The recent release of annual results from GPT group marked the end of A-REIT reporting season among the largest trusts. 

Strong income growth and the strong performance of A-REITs with lower gearing were the two key themes to emerge for the sector, according to Mark Wist, senior consultant at Atchison Consultants. 

GPT, which has a diversified portfolio including retail, office and industrial assets, was one of the stocks that performed strongly on these two measures, reporting an 8% increase in realised operating income (ROI) for the six months ended June 30, 2011 of $221.5 million and gearing reduced to a low 21%. 

Other A-REITs that demonstrated resilient earnings and low gearing and that provided strong returns in excess of the share market include Charter Hall Retail and Dexus, Wist says. 

Across the sector as a whole, the S&P/ASX 200 A-REIT index lost 8.8% of its value over the year to September, but outperformed the benchmark S&P/ASX 200, which declined by 14.11% over this period. 

“Across the A-REIT sector, operating income growth averaged 3.5% for six months to June which is greater than economic growth despite consumer sentiment at two-year lows and business sentiment at six month lows,” Wist says. 

“Growth in the retail property sector was higher at over 4% for the six months as inflation-linked rental escalations supported revenue. 

“Limited occupational vacancy across both retail and office property portfolios differentiates this cycle from the previous downturn when oversupply from substantial new developments crippled rental growth,” he says. 

Deutsche Bank analysts Ian Randall, Matthew Bertram and Jason Weate report that A-REIT reporting season stacked up well against the broader market. 

A-REIT earnings came in 0.7% ahead of the bank’s estimates with the analysts also noting the stronger performance of retail portfolios and the marginally disappointing performance of office REITs. 

The most heavily discounted AREITS are Australand, trading at a 22% discount to Deutsche Bank’s valuation, Stockland at a 23% discount and Westfield group at a 20% discount. 

The sector as a whole is trading at a 16% to its net asset value.

Rating agency Moody’s has a “stable” ratings outlook for A-REITs and expects the sector to steadily improve over the next 12 months.

Investment bank JP Morgan has a bullish outlook on listed property trusts with its top picks being those exposed to the retail and residential sectors, these being Stockland, GPT, Westfield Retail Trust and Mirvac.

According to the investment bank, a short term overly bearish sentiment on AREITS has made retail and residential attractive relative to office trusts.

Stockland is trading at a 23% discount to JP Morgan’s target price of $3.85.

Its other picks are Charter Hall Retail REIT and Commonwealth Office Property Office Fund.