Investors expected to reinvest strong dividend flow from REITs

MORE than $2.86 billion will be extracted from the real estate investment trust sector in coming days in distribution payments to investors, with most tipped to plough the cash back into the market.

MORE than $2.86 billion will be extracted from the real estate investment trust sector in coming days in distribution payments to investors, with most tipped to plough the cash back into the market.

Most REITs pay interim dividends, and some for the full year, by February 28. The breakdown is $1.96 billion in distributions this week, with a further $90 million by mid-March.

REIT reports show the average payout ratio is about 85 per cent of profits. In the financial crisis it was closer to half, indicating trust managers needed cash to pay bankers.

But with lower interest rates, brokers expect up to 90 per cent of distribution payments to be reinvested in the listed REITs.

The managing director of Maxim Asset Management, Winston Sammut, said reinvestment could provide further impetus for rises in REIT share prices.

In the past two weeks REITs have reported strong results and have been upbeat in outlook commentary. Most predict average earnings growth of 5 per cent, comfortably above the rate of inflation.

Having kept a lid on costs over the past year, most are also trading near or above net tangible asset levels, leading analysts to issue upgrades for the full year.

Andrew Smith, a director at Evergreen Capital, said a combination of lower interest rates and the weight of money from super funds would see more cash reinvested in REITS.

"Investors seem less concerned about stockpiling cash this dividend season, as some did a year ago, so there are high expectations a majority of this dividend season will be re-invested," he said. "There has been a run in some of the larger trusts as investors seek higher yields, which has pushed the security prices up. We are seeing good value in the small to medium trusts, which have had positive earnings results."

John Kim, property analyst at CLSA, said the 2013 reporting season had so far been about management changes and merger and acquisition targets. "We expect the volume of transactions to pick up to take advantage of REITs' lower cost of capital, modest gearing [27 per cent] and limited external growth from a local focus [mainly Australian mandates].

"Capital partners are also increasing allocations into REITs.

"We expect industrial assets to outperform retail, office and residential. Office is expected to remain resilient despite weak fundamentals in Sydney and Melbourne."