##{"id":59187,"date":"2011-11-21T13:39:30","date_gmt":"2011-11-21T02:39:30","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/11\/21\/rate-cut-cycle-boost-for-australian-reits\/"},"modified":"2011-11-21T13:39:30","modified_gmt":"2011-11-21T02:39:30","slug":"rate-cut-cycle-boost-for-australian-reits","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/11\/21\/rate-cut-cycle-boost-for-australian-reits\/","title":{"rendered":"Rate Cut Cycle Boost For Australian REITs"},"content":{"rendered":"

\n\t– Rate cut cycle a boost for Australian REITs<\/span>
\n\t– Current discounts to NTA<\/span> may return to historical premiums
\n\t– Sector dividend yields remain attractive
\n\t– Citi<\/span> and Credit Suisse update on preferred exposures<\/strong><\/p>\n

\n\t
\n\tBy Chris Shaw<\/p>\n

\n\tA likely beneficiary of the Reserve Bank of Australia's (RBA<\/span>) move to lower the cash rate to 4.5% at the start of November notes Citi<\/span> are Australian REITs<\/span>, as the change in official interest rates will mean investment spreads increase.<\/p>\n

\n\tThis is expected to support asset values, while also offering potential growth opportunities in the sector. For residential developers there should be improved affordability, something Citi<\/span> expects will increase the potential pool of buyers.<\/p>\n

\n\tThe cut in rates may also boost consumer sentiment, something Citi<\/span> suggests may be of benefit to retail landlords given a potential boost to net operating income as a result. The office sector is likely to see the smallest impact, though even here Citi<\/span> notes there will be a boost from a lower cost of funds.<\/p>\n

\n\tGiven a solid history of around 7% outperformance<\/span> by the Australian REIT sector in previous rate cutting cycles, Citi<\/span> suggests there is potential for the sector to again perform better than the broader market. <\/p>\n

\n\tThis could be seen in a tightening in the discounts to net tangible asset (NTA<\/span>) backing, from what Citi<\/span> estimates is a discount of around 10% at present. A premium to NTA<\/span> is not unrealistic, given a long-term average premium to NTA<\/span> for the sector of around 5.8%.<\/p>\n

\n\tWhile lower interest rates suggest a lower required return for investors, and therefore lower cap rates, Citi<\/span> notes the data show lower interest rates are actually associated with higher rather than lower cap rates. <\/p>\n

\n\tAssuming further rate cuts, and Citi<\/span> notes these are being priced in by the bond market at present, an improvement in residential indicators is likely. As Citi<\/span> points out, the Westpac-Melbourne Institute's Time-To-Buy index increased by 23% on average during the past three rate cut cycles. At the same time, housing finance commitments rose 6% on average in year-on-year terms in the 12-months following the first rate cut of an interest rate down cycle. <\/p>\n

\n\tIn terms of relative sector performance, Citi<\/span> notes historically the retail REIT sector outperforms its office peers in both rate cut and rate hike cycles but more markedly during the former. Office REITs<\/span> have relatively few benefits from a cycle of easing interest rates, Citi<\/span> noting net absorption, vacancies and rents have all deteriorated in previous rate cutting cycles.<\/p>\n

\n\tFrom an earnings perspective Citi<\/span> suggests there will be little impact on FY12<\/span> settlements from the recent rate cut, with FY13<\/span> to show a more pronounced effect as it will take some time for an improvement in momentum. <\/p>\n

\n\tBy FY14<\/span> Citi<\/span> sees scope for margin improvement in the sector, as a stabilising<\/span> of prices could feed through to higher prices per square metre<\/span> and a preference for larger sizes.<\/p>\n

\n\tIn the Australian REIT sector Citi<\/span> rates Abacus Property ((ABP<\/span>)), Australand<\/span> Property ((ALZ<\/span>)), BWP<\/span> Trust ((BWP<\/span>), CFS<\/span> Retail ((CFX<\/span>)), Charter Hall Group ((CHC<\/span>)), Charter Hall Office ((CQO<\/span>)), Commonwealth Property Office ((CPA)), Dexus<\/span> ((DXS<\/span>)), Goodman Group ((GMG<\/span>)), Mirvac<\/span> ((MGR<\/span>)), Stockland<\/span> ((SGP<\/span>)), Westfield Group ((WDC<\/span>)) and Westfield Retail ((WRT<\/span>)) as Buy.<\/p>\n

\n\tNeutral ratings are ascribed to Charter Hall Retail ((CQR<\/span>)), GPT<\/span> ((GPT<\/span>)) and Investa<\/span> Office ((IOF<\/span>)).<\/p>\n

\n\tThe focus of Credit Suisse has been on dividend yields in the Australian REIT sector, as the broker notes the forward yield currently stands at around 6.4%. This compares to a forecast average cash rate of 3.88% for the same period.<\/p>\n

\n\tOne key in any such analysis is the cost of debt, but as Credit Suisse notes the cost of debt in Australia is converging towards globally depressed levels, while investor appetite for yield is growing. This improves the potential for Australian REITs<\/span> to enjoy increased attention <\/p>\n

\n\tAs debt has become cheaper some Australian REITs<\/span> have refinanced and Credit Suisse sees this as increasing the likelihood earnings in the sector prove to be at least resilient. Earnings risk now appears skewed to the upside in the broker's view.<\/p>\n

\n\tUpcoming REIT dividend season should draw attention to the yields on offer in Credit Suisse's view, with the majority of the sector expected to trade ex-dividend on December 22. Dividends are likely to be declared sometime next month.<\/p>\n

\n\tAt the same time as dividend season for the REITs<\/span> should attract attention, Credit Suisse notes earnings growth forecasts for the broader equity market continue to be pushed out. This is improving the relative attraction of REITs<\/span>, especially as lower payout ratios increase the scope for property companies to redeploy retained earnings and so lift future payout ratios.<\/p>\n

\n\tIn particular, Credit Suisse sees Charter Hall Retail and Stockland<\/span> as the pick of stocks to watch for those investors chasing dividends at present. In general, Credit Suisse notes Australian REITs<\/span> tend to outperform on an absolute basis leading up to the ex-dividend date, while also outperforming on the ex-div date itself before underperforming in absolute terms post the ex-date.<\/p>\n

\n\tIn terms of preferred plays in the sector, Credit Suisse continues to favour<\/span> Westfield Retail, Westfield Group and Dexus<\/span> from a value perspective. All three stocks are rated Outperform by the broker.<\/p>\n

\n\t <\/p>\n

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