Australian real estate investment trusts (REITs) are under pressure as bond yields in the US rise following Donald Trump’s victory in the presidential election last Wednesday. The aftermath of the result has seen a rotation out of defensive yield names like Transurban Group (ASX: TCL), Telstra Corporation Ltd (ASX: TLS) and constituents of the broader S&P/ASX 200 A-REIT Index (ASX: XPJ).
With the latter index down almost 20% since August highs, I thought it was worth taking a closer look at two of its largest exponents – Shopping Cntrs Australs Prpty Gp Re Ltd (“SCA Property”) (ASX:SCP) and Vicinity Centres Re Ltd (ASX: VCX).
Readers must remember that bond yields are inverse to bond prices. As bond yields rise, bond prices fall given investors are willing to relinquish the safety of government bonds in search for higher returns elsewhere. This is typical risk-on behaviour which occurs in times of inflation and/or improved economic sentiment.
Given Donald Trump’s slated economic policies seem pro-business, global markets are pricing in the prospect of higher inflation and improved consumer confidence, causing outflows from safe asset classes like treasuries and defensive yield stocks. This is why Australia’s REITs are being sold-off.
Despite this, I believe long-term investors can still benefit from buying REITs like SCA Property and Vicinity Centres at current prices. Here’s why.
SCA Property is the property spin-off of supermarket giant Woolworths Limited (ASX: WOW). SCA Property listed on the S&P/ASX 200 Index (ASX: XJO) in 2012 and has grown to own 82 neighbourhood, sub-regional and freestanding retail shopping centres across Australia and New Zealand.
SCA Property is forecast to grow funds from operation by 1.8% in 2017, leaving the run rate on par with Australia’s current rate of inflation. Distributions are expected to swell to 12.6 cents per stapled unit in 2017, representing a robust 6% yield at Friday’s close of $2.09. This easily trumps bank deposit rates, making it attractive for income-seeking investors.
Vicinity Centres owns $23.6 billion of assets under management, comprising various retail shopping centres throughout Australia. It boasts a reputation as the second largest REIT in Australia behind Scentre Group (ASX: SCG) and co-owns and operates flagship shopping destinations like Melbourne Emporium to position it as an eminent player in the market.
For the year ended 30 June 2016, Vicinity Centres reported strong net tangible asset (NTA) growth to $2.59 per security. Earnings per share grew 9% to 19.1 cents, allowing management to pay full-year distributions of 17.7 cents per security.
Although earnings growth is likely to temper to 4.5% in 2017 (as a result of acquisitions and divestments), management should be able to maintain the current yield of 6.4% based on Friday’s close of $2.74. This makes it an opportune time to acquire this blue-chip property group.
With both property groups churning out solid growth in net profit and benefitting from the tailwind of improving property prices, long-term investors stand to benefit from stable income and incremental NTA growth.
Accordingly, whilst neither stock will provide blockbuster capital growth, patient investors will be rewarded with reliable income and earnings growth through all economic cycles.
With global interest rates set to remain at these “emergency low” levels for years -- perhaps even decades -- unless you take decisive action NOW, your retirement could be seriously at risk. Click here to learn how to NOT run out of money in retirement.
Motley Fool contributor Rachit Dudhwala owns shares of Shopping Centres Australasia Property Group and Telstra Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.