Stockland has announced that it is getting out of the office and industrial business sectors and out of the UK entirely. UK market conditions have deteriorated and real rental growth in Sydney’s CBD has grown by 1% for the last decade, suggesting it’s the right move. However, the company has received a setback in the sale of its industrial portfolio, which is in limbo following the collapse of negotiations with Singapore’s MapleTree Logistics Trust.
Exiting those businesses will free up $2.9 billion in capital for reinvestment, which Stockland has said it will use to increase its exposure to retail, residential and retirement sectors. The company has no plans to raise equity or bring on more debt.
The aim is that by 2017, retail will represent 65%, residential 23% and retirement 12% of its total asset mix. The company’s strategy is built on population growth and is focusing on corridors with higher than average expected population growth.
With political support for population growth of 330,000 people per annum, that will require 160,000 new dwellings, more than 500,000 square metres of new retail floor space and up to 5,000 retirement homes. According to the Australian Financial Review, over $35 billion worth of retirement villages will be needed in the next 20 years.
Stockland is also increasing exposure to regional areas where the company can achieve 14% internal rates of return due to a captive market and is selling off and reducing exposure to neighbourhood and CBD shopping centres. Stockland is increasing its exposure to major regional and regional centres, while focusing on food and services. An example of this strategy at work was the company’s purchase of Centro in Townsville in March 2012.
The company aims to have the number one shopping centre in trade area or the number two retail centre with strong point of difference.
The up-market strategy
Westfield’s strategy is completely different. The company is increasing its exposure to high-end shopping centres and has allocated 3 billion pounds in additional investment in the UK over the next few years. That comes on top of almost 4 billion pounds invested in two key shopping centres in London. The company is also selling lower-quality properties to focus on the upmarket end of the sector.
The reasons for Westfield’s strategy appear to be fairly obvious. The upper end of the market of retail businesses tend to earn higher margins and are more resistant to economic downturns, which means Westfield can charge higher rental rates and improve its margins, while limiting its exposure to higher risk, lower margin retailers.
Westfield Group shares have climbed 25% in the last 12 months, while Mirvac Group (ASX: MGR) shares have risen 19%, Goodman Group (ASX: GMG) is up 10%. Stockland has been the worst performer, up 8.5%. All companies have handily outperformed the broader market, which is up just 4.6%.
For investors, Australian retail investment trusts (A-REITs) used to be boring, high income paying investments. The availability of cheap debt preceding the GFC meant many A-REITs expanded too quickly and overpaid for many acquisitions. The collapse of Centro, owing billions of dollars, and several other property developers, illustrated that they were no longer safe or dependable income investments.
The REITs have gone through a tough time, and have been forced to recapitalise their balance sheets and sell off assets. Consequently they have lowered their dividend payment – as an example, Westfield’s current dividend yield is just 3.4%.
Its possible that both companies will be successful over the long term with their different strategies. In what is a good sign for income investors, REITS have cut back on their debt, rationalised their business and dividends and yields are likely to increase. Investors appear to like the sectors apparent turnaround and these companies could be ones to add to the watchlist.
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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.