A-REITs hit by volatility
The Australian real estate investment trust (A-REIT) sector has been hit by the volatile currency and uncertainty after the recent leadership changes in the federal government.
However, as the sun sets on the 2013 financial year, it remains one of the best-performing sectors compared with the sharemarket.
Analysts at UBS said the sector declined 10.4 per cent from its peak (a 15.9 per cent decrease in US dollar terms) as bond market volatility hit the sector and the market digested its impact on valuations and funds flow.
They said that since May 21 the 10-year bond had sold off about 65 basis points, with 3.2 per cent from May 20 to 3.85 per cent by June 26.
"The sector is currently trading at a 5 per cent discount to our valuation [discounted cash flow and net asset values DCF and NAV derived] of the sector," the analysts said.
"We remain comfortable with our 2013 financial year compound annual growth rate of 4.6 per cent with debt costs still declining."
The analysts said the A-REIT sector earnings were growing at 4 to 5 per cent in the medium term and should provide a buffer of about 25 basis points a year of upwards bond yield movements.
Given the hedging positions disclosed at the February half-year earnings results, Mirvac and DEXUS Property would have the lowest amount of hedging in the 2014 financial year and were the most susceptible to changes in interest rates.
"Our key picks remain Westfield, with overseas portfolio fundamentals offsetting difficult domestic environment, earnings upside from US dollar exposure and Federation Centres' 8 per cent forecast earnings growth in 2014 from the development spending on non-discretionary retail," the analysts said.
The head of REIT research at Goldman Sachs, Simon Wheatley, said that on May 21 the ASX200 REIT index hit 1135 points, only to subside to an intraday low below 1000 points on June 13.
"Given the pull-back for REITs amid weakness in broader yield-focused equities, Westfield Retail Trust, Australand and Investa Office Fund are back at price levels, even before adjusting for ex dividend, not seen since late 2012," he said. "Other REITs are pricing at levels last experienced in January 2013, when they had just gone ex dividend and ... were more expensive than the current cum dividend pricing."
According to the analysts at Bank of America Merrill Lynch, all A-REITs saw flat or positive distribution growth in the 2013 financial year, with the sector delivering 2.3 per cent growth.
This follows distribution growth of 3.8 per cent in the 2012 year and 5.5 per cent in 2011.