Shopping for yield

They took a pasting in the GFC, but suddenly real estate investment trusts are back in fashion and the returns show why, writes David Potts.

They took a pasting in the GFC, but suddenly real estate investment trusts are back in fashion and the returns show why, writes David Potts.

Guess what's returned 37 per cent in a year with less risk than quite possibly even crossing the street? What's more, the further interest rates drop, the better.

All right, 37 per cent might have been a fluke, but then an annual average of 16 per cent for three years running, during a period of lacklustre performance by almost everything, isn't so easy to dismiss.

Give up? Hey, a dead giveaway was when I said falling interest rates help.

That's better. Yes, it has to have something to do with property.

In fact it's commercial property, and the investment is a managed fund that invests in listed real estate investment trusts (REITs).

The Cromwell Phoenix Property Securities Fund is a bit like super in being unlisted but investing in listed stocks, in this case property trusts.

Mind you, there's a listed arm as well: Cromwell Property Group (CMW), which is the responsible entity (REIT-speak for trustee) should you prefer to invest in the one collecting the fees, rather than paying them.

So far this year, the share prices of some REITs have jumped more than 40 per cent.

Commercial real estate values have done nowhere near that.


So what's going on?

To be blunt, REITs came a cropper during the GFC - over-borrowed and over there as they ventured offshore, basically - and it's only now that they're coming back into favour.

There was usually nothing wrong with the properties they owned the problem was they had negatively geared to the hilt.

"They suffered a tremendous decline, part of which was their fault and part market, with very erratic trading going on," says Howard Brenchley, the executive director of APN Property Group, which also manages REITs.

Even in their darkest hour during the GFC, when at one point their prices had crashed 70 per cent in some cases, they were collecting the same rents, if not increasing them. Yet mostly their properties hadn't fallen much in value, and they've since reined in their debt as well.

Some still trade for less than their properties are valued at.

To this day, big institutional investors are wary of them.

Fund managers are reluctant but offshore investors are snapping up stakes, according to a report by Morningstar.

The REITs also appeal to ordinary investors and DIY super funds, yielding 6 per cent to 8 per cent, in some cases tax-free.

Often, there may be no tax until you sell. And it's possible you might never pay tax if you're below the threshold when you sell or you're eligible for, say, the senior Australians' offset.

Admittedly, the deal isn't as good as franked dividends, where theoretically you could get 30? back from the government on every dollar of dividend earned but then the risk normally isn't as high as on shares, except when there's a GFC, and in any case it sure is a better deal than you'd get from a term deposit.

So just how safe are REITs? They're not perfect since they do, after all, trade on the sharemarket, which isn't always rational.

At least they've come a long way since the GFC, and on the whole have their debt down to about 25 per cent of assets after a series of unedifying rights issues.


You wouldn't want to have been in a REIT for most of the past five years, but in a funny way that's what makes them attractive today.

Arguably, the market hasn't kept up with their improvements.

Then again, most REITs invest in shopping centres and so rely on retailers for the rent.

And everybody knows retailers are doing it tough.

Tough, yes, but not all of them are struggling. Supermarkets aren't, nor are specialty shops that hit the right note.

Some big brand names such as Abercrombie & Fitch, Top Shop, Uniqlo and Zara are queuing up to get into our malls.

Stuart Cartledge, the managing director of Phoenix Portfolios, which manages Cromwell's fund of REITs, describes it as if they're almost elbowing out some of the little Aussie boutiques.

"Those in real trouble are being replaced by offshore guys with a better business model," he says.

Supermarkets and department stores bring customers, but it's the specialty shops that make the money for landlords because every year there are always a few leases up for renewal for a higher rent.

Also, nowadays leases are indexed rather than tied to turnover.

That's why their distributions (REIT-speak for dividends) should be reliable.

Did I mention supermarkets? No shopping mall is complete without one and Woolworths is offering its own REIT.

It's spinning off shopping centres - all with a Woolworths - into the Shopping Centres Australasia Property Group, or SCA Property Group.

Woolies shareholders get five units for free in the new trust for every share they hold, while everybody else will have to pay between $1.26 and $1.50 a unit.

That gives a yield of 6.9 per cent to 8.3 per cent, with up to 40 per cent of it tax deferred.

The offer closes on November 20.


The mother of all REITs is the Westfield Retail Trust (WRT), another one that trades for less than its properties are worth.

The most plausible explanation is that, well, it's a Westfield and you never know what the mother stock (WDC) might use it for.

Even so, REITs often trade at a discount, making them even more attractive as long as the properties have been valued correctly, not to mention recently, while frustrating longer-term investors.

Others at a discount invest in office or industrial properties, such as Dexus (DXS), GPT Group (GPT), Commonwealth Office (CPA) and Investa Office (IOF). The fall in interest rates is a windfall for REITs.

They become even more competitive against term deposits and bonds, for starters, and their own debt is cheaper.

If you can't decide between the 49 listed by the ASX, you could always take the lot with an exchange-traded fund (ETF).

ETFs trade on the sharemarket in every way like a share. There are two: Vanguard's VAP and SPDR's SLF, which come with a low annual fee.

Or if you'd prefer to avoid the market's volatility there are the property securities trusts, which are unlisted, in which case you should look at them only as a long-term investment.

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