Brokers Excited About REITs

This story features GOODMAN GROUP, and other companies. For more info SHARE ANALYSIS: GMG

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

We last left the Australian real estate investment trust (REIT) discussion on Monday, with Citi suggesting the impact of a falling dollar on A-REITs with US exposure would not be as dramatic as it was in 2008 and maybe even mildly positive. But in the last couple of days, two other major brokers have thrown their hats into the local REIT ring.

JP Morgan is quite effusive, suggesting current discounts to net tangible asset values (NTA) are compelling.

It's a been a wild ride in the REIT sector these past years, but after smoothing out such swings JPM notes the long-term premium of REIT value to NTA is 3%, yet the analysts have identified a basket of larger REITs with an average discount to NTA of 28%. Most recently the market has tended to ignore NTA given uncertainty surrounding real estate values, but JPM notes underlying asset values have now corrected by 20% across the sector. NTAs “make a lot more sense now”, say the analysts, given the simpler balance sheets and lower gearing of the trusts.

If anything, the REIT sector's NTA's are now understated, they suggest, and yields have returned to a positive spread over the bond rate. Taking those REITs with big operational businesses out of the universe, being Westfield ((WDC)), Goodman Group ((GMG)) and Stockland ((SGP)), JPM has picked the eyes out of its group with an the big discount.

The analysts have Overweight ratings on Charter Hall Office ((CQO)), ING Office ((IOF)) and ING Industrial ((IIF)). They also note dislocated price-to-book ratios on the “quality” portfolios of Commonwealth Property Office ((CPA)) and GPT Group ((GPT)), but have Neutral and Underweight ratings on the two respectively due to valuation.

BA Merrill Lynch is also excited about REITs, but is not quite as excited about office funds, preferring retail and diversified funds instead.

The need for significant office maintenance spend and tenant discounts in the office space have meant current yields are “appropriate”, says Merrills, while retail and diversifieds have reached cyclical lows in funding and development and thus are offering greater growth potential now that asset prices are stabilising and projects are becoming more feasible again.

Yesterday Merrills upgraded CFS Retail ((CFX)) and Charter Hall Retail ((CQR)) to Buy to join Stockland ((SGP)) as the broker's three top REIT picks.

The analysts agree Commonwealth Property and GPT are well-valued, having Underperform ratings on both along with Bunnings Property ((BWP)), and yesterday they downgraded Dexus ((DXS)) and Challenger Diversified ((CDI)) to Underperform as well.

But Merrills also has Buys on Abacus Property ((ABP)), Australand ((ALZ)), Lend Lease ((LLC)) and ING Office.

Click to view our Glossary of Financial Terms