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Published 24 January 2013 01:28, Updated 05 February 2013 22:05
Appeal: SCA Property Group has Woolwoths as its main tenant
Can the real estate investment trusts sector repeat last year’s stellar performance and dwarf the average sharemarket return in 2013? That question will preoccupy yield-driven investors, who may have to look beyond the big names to mid-cap trusts.
The S&P/ASX 200 A-REIT index has returned a whopping 28 per cent (including distributions) over 12 months. The S&P ASX 200 Accumulation Index managed 19 per cent. The performance gap impresses, given so many A-REITs were badly out of favour a few years ago because of excessive debt and risk-taking.
Similar returns in 2013 seem unlikely, although the A-REIT sector should have a solid year as further interest rate cuts makes its average yield more attractive relative to bank term deposits.
However, valuations are not nearly as attractive as a year ago when several key A-REITs traded below the value of their net tangible assets (NTA).
The danger is valuations become too stretched. The sector is off to a cracking start in 2013, already up 2.7 per cent compared with 1.9 per cent for the S&P/ASX 200. Westfield Group, Mirvac Group and other key A-REITs are trading near three-year highs. Others may join them if cuts in the official cash rate boost demand for higher-yielding securities.
In these situations it often pays to look beyond the sector leaders to small and mid-cap stocks that have potential for further valuation gains, or have not rallied as hard. Conservative investors should stick to sector leaders or use an exchange-traded fund (ETF), such as the SPDR S&P/ASX 200 Listed Property Fund, for low-cost index exposure.
Those willing to take more risk might consider new trusts such as the Woolworths spin-off, Shopping Centres Australasia (SCA) Property Group, and NEXTDC spin-off Asia Pacific Data Centre Group.
SCA Property Group was 2012’s largest float, raising $472 million. After listing in late November, its $1.40 issued units have risen to $1.55. The $900 million trust will own a portfolio of 69 shopping centres and retail assets across Australia and New Zealand, with Woolworths as the main long-term tenant.
SCA’s exposure to non-discretionary retailing such as supermarkets appeals. A-REITs that are heavily exposed to specialty retailers and department stores have weaker prospects for rental growth as they struggle amid sluggish sales growth and the online retail threat.
At $1.55, SCA’s forecast yield is an attractive 6.8 per cent, and its forecast NTA per unit is $1.58. Critics could argue SCA should trade at a bigger discount to NTA given it has only a few months history as a listed trust. But its defensive characteristics and Woolworths connection justify the valuation.
Like SCA, Charter Hall Retail REIT and BWP Trust have higher-quality retail tenants. Charter Hall counts Woolworths and Coles as key tenants in a big chunk of its Australian property portfolio.
BWP Trust relies on Bunnings Warehouse as its core tenant and is the only A-REIT focused solely on bulky goods retailing. Yields above 6 per cent for Charter Hall and BWP are compelling but both look fully valued and best accumulated at lower prices after their recent rallies.
The other A-REIT newcomer, Asia Pacific Data Centre (APDC), has a higher risk profile, given its tenant is NEXTDC, the fast-growing data centre operator that is yet to make a profit. NEXTDC is selling its property assets in Melbourne, Sydney and Perth, and possibly others built in the next three years, to APDC and leasing them back.
APDC raised $88 million and listed in early January, a top effort given investor disinterest in IPOs. The float ticked many boxes: NEXTDC will hold 23 per cent of APDC, its founder, Bevan Slattery, invested in the IPO on the same terms as other investors and the relationship between NEXTDC and APDC was straightforward and fair.
Investing in APDC requires faith in NEXTDC, which has been among the best-performed IPOs, its $1 issued shares racing to $1.73 since their December 2010 listing. NEXTDC is well positioned to capitalise on the demand for information storage when the supply of state-of-the-art centres has been limited.
NEXTDC’s believers will like APDC, which should benefit as NEXTDC opens more centres and attracts more tenants, thus reducing APDC’s rental risks. NEXTDC’s interim profit report in February should give more clues. APDC’s forecast 9 per cent annual distribution yield, provided it delivers, is eye-catching.
APDC and SCA look capable of providing good yield and modest capital growth without excessive risk. With bank deposit rates falling, these A-REITs seem a reasonable option for experienced income-seeking investors.
The author owns 544 SCA shares via his Woolworths shareholding.