Markets: Get Real

The real estate sector is undervalued and has plenty of upside potential according to Morgan Stanley.

Morgan Stanley is bullish on Australian property stocks.

“Despite our cautious view on underlying property fundamentals, especially in discretionary retail malls and office; we believe the sector is well positioned in an uncertain macro environment with 7 per net upside to valuation, 7 per cent cash flow yield and 4.5-5 per cent 3-year compound annual growth in funds form operations,” says Morgan Stanley analyst Lou Pirenc.

“Further reductions in interest rates and sector restructuring will act as catalysts for outperformance,” he adds.

Pirenc’s favorite stocks are real estate investment trusts, specifically those exposed to industrial property such as the Goodman Group.

The company “is in a good position to accelerate its growth profile after increasing fire power through a capital raising and asset recycling,” he says. “We expect Stockland to surprise on the upside as its earnings growth accelerates whilst cleaning up the business.”

Pirenc says Federation Centres is getting little to no credit for its superior earnings growth and asset recycling plan.

Westfield Group’s dominant position, offshore exposure and significant development pipeline positions it well for an acceleration in growth, he says.

The Morgan Stanley analyst also likes GPT Group and says the stock market is giving it no credit for its $80 million a year funds management business.

Lend Lease, says Pirenc, continues to look cheap and upside from future projects is attractive. However, this message from the company has been negated by negative news flow on construction and Lend Lease suffers from poor communication.