A-REITs "attractive" in weak macro setting: Morgan Stanley

The investment bank picks A-REITs to outperform over the next year as growth in the wider market slows.

Morgan Stanley has raised its view of Australian real estate investment trusts (A-REITs) to "attractive", believing the sector will outperform over the next 12 months in "an uncertain macro environment".

Despite being wary about rental growth fundamentals and lack of demand in the sector, especially for Australian retail and office, the investment bank thinks its resilient earnings growth and strong yield will increasingly appeal to investors as pressure heightens for interest rates to be cut (see Ian Verrender's Rate cut now considered a certainty).

Further, the industry's ongoing restructuring and consolidation, such as the potential internalisation of Commonwealth Property Office Fund announced last week, will continue to drive interest.

The bank's growth estimate for Australia's wider market is at 5% over the next year, much lower than the consensus forecast for 7.9%.

"As we have already seen a number of downgrades recently, we would not be surprised to see the growth rate... come down over the next earnings season, making the A-REIT sector look relatively attractive," the bank said.

Morgan Stanley's top three picks in the sector are Goodman Group, Stockland and Federation Centres.

The bank sees a potential 6.5% upside to its price targets on a weighted average basis.

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