Which AREIT to buy in boom?

Steel yourselves for a further round of Shakespeare's hopelessly and oft misquoted line about bubbles and trouble as the Australian residential property market continues its rise.

But the record low interest rates that have lit the fire under the real estate cauldron have also begun to awaken interest in real estate investment trusts with residential exposure.

Of the four major AREITs – Mirvac (MGR), Stockland (SGP), Lend Lease (LLC) and Australand (ALZ) – it is the latter with the greatest exposure to Sydney's booming market and hence the capacity to lift earnings in the next 18 months.

Australand was thrust into the spotlight late last year when GPT (GPT) made a $3 billion offer to gut the company, offering to buy the group's industrial and office portfolio – which comprise about 75% of the assets – but leave it with its residential business.

Australand resisted, arguing it preferred a complete bid rather than an asset sale and GPT finally walked in May.

Australand's unit price dropped accordingly, falling from a $3.75 peak in April to $3.20 in June. In hindsight, it was probably not a great decision on the part of the Australand board who deemed the GPT offer inadequate, declaring it would conduct a review to maximise value.

But value is being conferred upon the residential portfolio regardless of any review and Australand's unit price now is back to $3.60.

Of all the AREITs, Australand has the greatest earnings exposure to residential with 25% of assets – MIrvac has 16% and Stockland 20% – and is more exposed to the Sydney market than its larger rivals.

A study by JP Morgan assumes Sydney real estate will climb 10% this year and a further 10% next year (see Sydney's property rebuild) which would help dive Australand earnings per share 16.1% in the 2015 financial year.

The company has 19,000 unsold lots and was actively acquiring in Victoria in 2008, bought two sizeable NSW apartment sites in 2011 and has been noticeably absent from the troubled Queensland market and Western Australia.

While the Reserve Bank has begun sounding warnings to major banks to maintain lending standards in order to avoid a rapid escalation in real estate prices, pent up demand after several years of sliding values and tight supply in Sydney should continue to drive the market higher.