A-REITs hit by volatility
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.
Frequently Asked Questions about this Article…
The A-REIT sector was hit by volatile currency conditions and uncertainty following recent federal government leadership changes. Bond market volatility also played a big role — analysts note a sell-off in the 10‑year bond (about 65 basis points since May 21), which affected valuations and funds flow into REITs.
Despite the volatility, the A-REIT sector remained one of the better-performing sectors versus the broader sharemarket as the 2013 financial year closed. Analysts reported the sector had declined from its peak but still showed resilience relative to many other equities.
Rising bond yields pressured REIT valuations as investors digested the effect on cash flows and capital costs. UBS analysts said the sector fell about 10.4% from its peak (15.9% in US dollar terms) and was trading roughly a 5% discount to their DCF/NAV valuations after the bond‑market sell‑off.
Based on hedging positions disclosed at the February half‑year results, Mirvac and DEXUS Property were highlighted as having the lowest amount of hedging for the 2014 financial year, making them more susceptible to changes in interest rates.
Analysts cited Westfield as a key pick because its overseas portfolio and US dollar exposure could offset a difficult domestic environment and provide earnings upside. Federation Centres was also favoured for a forecast 8% earnings growth in 2014 driven by development spending on non‑discretionary retail.
Yes. Bank of America Merrill Lynch analysts reported that all A-REITs saw flat or positive distribution growth in the 2013 financial year, with the sector delivering 2.3% distribution growth. That followed 3.8% growth in 2012 and 5.5% in 2011.
Goldman Sachs' REIT research head noted the ASX200 REIT index fell from 1,135 on May 21 to an intraday low below 1,000 on June 13. As a result, Westfield Retail Trust, Australand and Investa Office Fund returned to price levels not seen since late 2012, while other REITs were trading at levels seen in January 2013.
Analysts expect A-REIT earnings to grow about 4–5% in the medium term. They suggested this earnings growth should provide a buffer of roughly 25 basis points a year against upward movements in bond yields, and UBS remained comfortable with a 2013 financial year compound annual growth rate of about 4.6% as debt costs continued to decline.
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