The listed property sector is on the road to recovery, a BDO survey finds
By Tony Featherstone, journalist
The Australian Real Estate Investment Trusts (A-REITs) sector is showing stronger signs of life after significantly underperforming the All Ordinaries index since February 2007. The S&P/ASX A-REIT 200 index (Property Index) returned 24 per cent in the six months to December 31, 2009, the best performance in more than two and a half years, the latest BDO A-REIT survey shows.
Care is needed extrapolating the performance of the Property Index to all A-REITs because of the 40 per cent weighting of Westfield Group, the world's largest A-REIT, in this index. However, beneath the headline index result is an A-REITs sector that is resolving problems such as excessive debt and high volatility, and stabilising after a tumultuous three years.
(Editor�s note: View the full BDO report)
"The property sector, once again, is demonstrating its resilience," says BDO's national director, corporate finance, Sebastian Stevens. "Having been dramatically impacted by economic events since mid-October 2007, the sector is now showing signs of stabilisation and the ability to grow again".
"Capital-management initiatives undertaken in the first half of 2009 repaired the balance sheets of a number of entities and helped to reduce risk associated with the (A-REITs) sector, while the turnaround in consumer and investor confidence in mid-2009 saw renewed interest in the sector. With many entities reporting that property valuations have stabilised and the bottom of the valuation cycle possibly close to being reached, the sector currently looks more encouraging than any time in the past two years".
(Editor's note: do not read this general view as a recommendation to buy A-REITs, but rather as an observation that property managers have addressed several problems in the past two years). Key issues for A-REIT investors
The BDO A-REIT Half-Year Survey 2010 considered important sector issues such as:
Here is a snapshot of the main findings for each: Returns
Fifty-one of 56 A-REITs examined by BDO recorded a positive total return for the survey period. The Property Index is recovering from its March 2009 lows - at one point it was almost 80 per cent below its February 2007 high. But the sector has underperformed the All Ordinaries index during the recovery, and is still 65 per cent below its high. This shows the scale of problems A-REITs faced during the global financial crisis. Investors must decide whether this long period of underperformance could be followed by a period of outperformance in coming years as the sector strengthens. Volatility
At one point during October 2008, the Property Index moved more than 5 per cent on 13 out of 23 trading days. This was almost unimaginable for a sector historically considered to be more defensive and less volatile for conservative income-seeking investors. The sector generally has been more volatile than the All Ordinaries since February 2007. The good news is this volatility is reducing as balance-sheet recapitalisations and asset sales reduce sector risk, says BDO. Valuations
BDO found the majority of A-REITs revalued a large proportion of their property portfolios in the survey period. There were decreases in property valuations in 41 of 56 A-REITs. But the average fall was only 3 per cent compared to 16 per cent for the 12 months to June 30, 2009. "This suggests the rate of the falls in valuations has stabilised," says BDO. Six A-REITs had higher property valuations. Gearing
BDO found the 10 largest A-REITs reduced their gearing over the year ending December 31, 2009 by an average 12 per cent. ((Editor's note: Gearing is net debt (interest-bearing liabilities less cash) divided by total assets)).
However, BDO found the smallest 10 A-REITs increased their gearing in the survey period. BDO said: "This indicates the smaller entities were not able to raise sufficient equity capital, or had lower quality assets that were easily able to be offloaded, to offset the effect of declining asset values on gearing." Dilutions
Like companies in other sectors, A-REITs undertook large capital raisings to repair their balance sheets and reduce gearing levels. Balance sheets improved, but the downside was more securities were issued through share placements or rights issues. BDO found the number of units on issue from A-REITs rose sharply during the survey period, highlighting the extent of capital raisings. More securities on issue means earnings and distributions have to be spread among more securities. Distributions
Dilution was a key factor behind lower distributions and yields during the survey period. BDO found average distribution yield fell because of lower distributions per security and higher A-REIT unit prices. Twenty-three A-REITs are not paying a distribution for the survey period, compared with 14 at the same time last year. "This indicates a greater number of entities are adopting more-conservative cash-management policies," says BDO. BDO's top 10 rankings
BDO found the best performers during the survey period were generally smaller to mid-size A-REITs that benefitted from more sector interest. Here are the top 10 rankings:
1. GEO Property Group (diversified property) 2. Multiplex European Property Fund (retail shopping centres) 3. Challenger Wine Trust (industrial estates) 4. Cedar Woods Properties (property development) 5. Centro Properties Group (retail shopping centres) 6. Peet (property development) 7. Lend Lease Group (property development) 8. Cromwell Group (diversified property) 9. Westpac Office Trust (office buildings) 10. Astro Japan Property Trust (diversified property)
About the author
Tony Featherstone is a former managing editor of BRW and Shares magazines, and is consulting editor of ASX Investor Update.
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