RESIDENTIAL and retail-focused real estate investment trusts were sold down last week amid flat pre-Christmas trading and home sales.
The REIT sector posted a 1.1 per cent decline in average prices but still managed to outperform the general equity market, which fell by 2.8 per cent.
The harder hit stocks included FKP and Australand, which have exposure to the volatile retirement and residential sectors.
Bank of America Merrill Lynch brokers said the negatives to the Australand outlook were a protracted downturn in residential markets and continued poor consumer sentiment, development margin contraction and increasing portfolio vacancies. On the upside was the possibility of a strong recovery in residential markets and quicker lease up of new developments.
On FKP, the brokers said the upside was a sharp improvement in residential markets and buyer sentiment towards second-tier investment property.
"Downside risks are a further slowdown in residential markets, a tightening of bank lending requirements for home buyers and delays in selling the investment portfolio and development assets," the brokers said.
After last week's annual meeting for Lend Lease, which also has large residential and retail exposure, the brokers said that with the apartments and non-residential building sectors showing few signs of life, winning bids in the infrastructure space would be key for Lend Lease.
"If Lend Lease were required to fund half the current negative working capital with debt, we estimate the higher interest expense would see net profit fall by about 9 per cent and our return on equity forecast of 13.1 per cent falls to 11.9 per cent," the brokers said.
The standout for the sector was Mirvac, which has had strong buyer interest for its second stage of the Harold Park development in Glebe.