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Discord over impact of AREIT performance
Morningstar's Australian listed property sector wrap-up has found Australian Real Estate Investment Trusts (AREITs) appeared to be making a comeback - but Goldman Sachs Asset Management head of Australian equities Dion Hershan said the asset manager had gone from an overweight to almost non-existent allocation to the sector because it had already peaked.
Morningstar said healthier balance sheets, reduced gearing, divestment of offshore assets, more sustainable payout ratios and a return to traditional rent collection - which continued to be high and stable - were indicators that Australian listed property assets were on the mend.
Despite a highly concentrated universe of stocks, Morningstar said AREITs were beneficial for investors targeting income, whereas global property was a greater source of capital growth.
It said investors needed to assess existing exposures and employ REITs as a defensive component of no more than 10 per cent (including global listed property) of a broader Australian equities or global listed property portfolio.
But Hershan said the asset manager had been an early mover into the sector when valuations were low, but after 12 months of strong relative and absolute performance the sector was beginning to look less appealing.
Hershan said sector fundamentals, which were inherently linked to an ailing retail and office space market, had started to soften. Although there had been a lag, economic conditions were starting to affect the sector.
Re-leasing spreads had turned negative for new tenants and were starting to show strain after six months of no rental growth, he said.
"There's no longer any growth for rental and when new tenants come into malls, it's actually at rents below what the prior tenants were paying," he said.
Although AREITs had not returned to many of the behaviours they had exhibited before the global financial crisis, risk profiles were starting to inch up slowly, Hershan said.
"There's a lot of things REITs can do to boost reportable profits. After three years we've got to a point where more risk is going back into the sector, quite simply because growth is more challenging in the sector today than a year or two years ago and by virtue of that, it's not surprising REIT managers are looking for other ways to grow," he said.
Hershan said the annual reporting season had revealed that investors were chasing yield at any cost.
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