MARKETS SPECTATOR: REIT renovation

Macquarie Group sees demand from domestic property trusts combining with foreign buying to lift the value of REIT assets.

In a review of the listed property sector, Macquarie Group upgraded a number of the more defensively positioned REITS (real estate investment trusts) as it sees movement in net tangible asset values.

Recently, Macquarie Group believes we’ve seen a pick-up in foreign demand for Australian real estate assets which is combining with domestic demand from REITS. These REITS, with lowly geared balance sheets can now buy assets in an earnings accretive manner which should be positive over the next 12-36 months and place upward pressure on REIT NTAs.

"In absolute terms the REIT sector continues to look attractive. Dividend and free cash flow yields remain approximately 230 bps above 10-year bond yields, with a high degree of earnings certainty and upward pressure on NTAs to emerge over calendar 2013," Macquarie Group said in its note.

"However REITs are now trading at a PE premium to the market with the absolute dividend yield (~5.7 per cent) also broadly in line with the All Industrials before consideration of franking credits. Comparison to the US on a dividend yield spread to bond basis would imply a further ~5 per cent upside to current share prices."

Looking ahead, the broker believes the lower debt costs will provide a tail wind to the earnings profile of the more pure defensive REITS over the next couple of years. On the back of this, Macquarie likes the risk/reward profile of the defensive names that have strong leasing platforms that can deliver in a soft demand environment.

Subsequently, it upgraded CFS Retail Trust, Westfield Retail Trust, Investa Office Fund, GPT Group and Dexus Property Group to outperform recommendations.

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