##{"id":60533,"date":"2012-09-06T15:26:38","date_gmt":"2012-09-06T05:26:38","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/09\/06\/more-reit-reviews\/"},"modified":"2012-09-06T15:26:38","modified_gmt":"2012-09-06T05:26:38","slug":"more-reit-reviews","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/09\/06\/more-reit-reviews\/","title":{"rendered":"More REIT Reviews"},"content":{"rendered":"

\n\t – More A-REIT updates post reporting season
\n\t – UBS prefers retail sector to office and residential exposures
\n\t – Preferred exposures updated
\n\t – JP Morgan also reviews its retail preferences<\/strong><\/p>\n

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

\n\tFollowing the recent Australian real estate investment trust (REIT) reporting season brokers have updated their views and preferences in the sector (See: REIT Preferences Post Reporting Season<\/a>), with UBS the latest to undertake such an analysis.<\/p>\n

\n\tFor UBS the result season delivered a solid set of results from A-REITs<\/span>, with earnings growth of 3% and distribution growth of 5% both in line with expectations. With low interest rates providing something of a buffer, UBS has left forecasts for FY13<\/span> largely unchanged post the results.<\/p>\n

\n\tWhat has changed for the better is valuations, as UBS has lifted valuations across the sector by 2.5%. The increases reflect rolling forward of net asset values, slightly tighter cap rates and some reductions in overheads.<\/p>\n

\n\tUBS noticed some key themes to emerge in the various REIT sectors, for retail this being the fact regional shopping centres<\/span> underperformed<\/span> sub-regionals. The sub-regionals and convenience stores reported both higher net operating income growth and stronger like-for-like growth during the period.<\/p>\n

\n\tUBS attributes this to a deterioration in the strength of the regional department store's anchor and the fact regional shopping centres<\/span> lost market share in the discount department store and supermarket categories.<\/p>\n

\n\tWhat could address this decline in coming years is international retailers acting as additional anchors in regional centres<\/span>. UBS suggests such an outcome would boost market share, foot traffic and net operating income for the regional centres relative to the sub-regional centres<\/span>. Going forward, UBS continues to prefer regional over sub-regional centres<\/span> for the medium-term.<\/p>\n

\n\tIn the office sector UBS notes there are higher incentives being offered for a longer period of time, while payout ratios are likely to remain under pressure. As well, UBS points out all office REITs<\/span> remain in acquisition mode, reflecting the availability of some balance sheet capacity. <\/p>\n

\n\tAmong residential plays UBS sees little sign of improvement in conditions, while companies in the sector are moving to break interest rate hedges rather than to consider buybacks<\/span> as the tool of choice for boosting returns to unitholders<\/span>.<\/p>\n

\n\tIn summary, UBS continues to prefer retail over office and residential exposures, in part because any stimulus is likely to prove to be more supportive for the retail sector and transactions in the sector remain supportive of current book values.<\/p>\n

\n\tKey picks for the broker remain Westfield Retail Trust ((WRT<\/span>)) on valuation grounds, Centro Retail ((CRF<\/span>)) for a strong earnings growth outlook, Westfield Group ((WDC<\/span>)) given a buyback while waiting for development starts should be supportive and Commonwealth Property Office ((CPA)) due to expected earnings upgrades from FY13<\/span>. Among the small caps UBS has Charter Hall Group ((CHC<\/span>)) as its best pick.<\/p>\n

\n\tSentiment Indicator readings for the stocks according to the FNArena<\/span> database stand at 0.6 for Charter Hall Group, 0.1 for Westfield Retail and Westfield Group, 0.0 for Centro Retail and minus 0.7 for Commonwealth Property Office. <\/p>\n

\n\tJP Morgan has followed up its review of REIT earnings results by further reviewing performance of retail REITs<\/span> post a profit season that showed no major changes to the major retail trend of subdued sales growth. <\/p>\n

\n\tResults offered some evidence of a moderation in rental growth, which JP Morgan attributes to re-leasing spreads turning negative. This trend should continue, as JP Morgan is expecting a 5% reduction in specialty rents on renewals for all lease expiries<\/span> over the next two years. <\/p>\n

\n\tThis is not expected to have any significant impact on occupancy levels, while the broker's forecast is for net operating income to fall from 3.3% in FY12<\/span> to between 2.5-3.0% over the next 18 months.<\/p>\n

\n\tAsset values among retail REITs<\/span> remain stable, JP Morgan noting prime retail assets continue to attract prices that are supportive of book value for the assets. Vacancies remain a non-issue as supply remains at below trend levels and cap rates remain stable.<\/p>\n

\n\tIn terms of preferences among retail landlords, JP Morgan remains overweight on Westfield Retail, GPT<\/span> ((GPT<\/span>)), Stockland<\/span> ((SGP<\/span>)), Mirvac<\/span> ((MGR<\/span>)) and Carindale<\/span> Property ((CDP<\/span>)). JP Morgan rates CFS<\/span> Retail ((CFX<\/span>)) as Neutral and is Underweight on Westfield Group, Centro Retail, Charter Hall Retail ((CQR<\/span>)) and BWP<\/span> Trust ((BWP<\/span>)).<\/p>\n

\n\tJP Morgan suggests both the Westfield Retail and Carindale<\/span> Property share prices imply the greatest move in cap rates going forward, while there is some cap rate compression priced into both Charter Hall Retail and BWP<\/span>.<\/p>\n

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