Volatility besets real estate trusts

Residential and retail-focused real estate investment trusts were sold down amid concerns about a flat pre-Christmas trading and home-sales period, which made investors wary of near-term leasing and sales performance.

For the first time in recent months the REIT sector posted a 1.1% decline in average prices, but it still outperformed the general equity market, which fell by 2.8%.

Brokers identified FKP and Australand as among the harder-hit stocks, largely because both have exposure to the more volatile retirement and residential sectors.

Bank of America Merrill Lynch brokers warned the main risks for Australand include a protracted downturn in residential markets, continued poor consumer sentiment, development margin contraction and increasing portfolio vacancies.

Brokers said upside for Australand would come from a strong recovery in residential markets and quicker-than-expected leasing of new developments; for FKP they pointed to a sharp improvement in residential markets and improved buyer sentiment toward second-tier investment property.

Mirvac stood out because it reported strong buyer interest for the second stage of its Harold Park development in Glebe, Sydney, signalling healthy demand for that project despite broader sector volatility.

The recent volatility highlights that residential- and retail-focused REITs can be sensitive to short-term trading seasons, consumer sentiment and leasing conditions; everyday investors should be aware that these factors can drive swings in REIT prices.

Exposure to volatile retirement and residential sectors has contributed to larger share price falls for some REITs — brokers flagged that weak consumer sentiment, slower home sales or rising vacancies can pressure development margins and valuations.