Australian Real Estate Investment Trusts, often referred to as A-REITs, or REITs for short, have been a haven for income-seeking investors. Since the GFC, with low interest rates and something of a property boom in capital cities, REITs have done well through acquisitions and rising rental rates.
The winds of change are in the air however, and the tailwinds that previously made REITs so attractive could begin to blow in another direction, not to mention that investors must pay a large premium for most REITs. Here are some of the more popular REITs, and a few things to consider before buying:
Goodman Group (ASX: GMG) – last traded at $6.80, yields 3%
Goodman is valued at a 65% premium to its Net Tangible Assets (NTA) of $4.10 per share, partly due to its large land bank in China, and low 'gearing' (debt) of 12%.
Westfield Corp Ltd (ASX: WFD) – last traded at $8.84, yields 3.8%
Westfield trades at a premium of approximately 53% to its NTA of US$4.44, assuming the USD buys $1.33 Australian. Westfield's gearing is 29%.
Scentre Group (ASX: SCG) – last traded at $4.41, yields 4.8%
Scentre Group's premium has fallen due to fears of a slowdown in the Australian economy, yet it is still valued at a 28% premium to its NTA of $3.44 per share. Gearing is 33%.
Cromwell Group (ASX: CMW) – last traded at $0.95, yields 6.1%
Cromwell Group is a smaller REIT that carries a relatively high debt load, and trades at a 17% premium to its NTA of $0.81. Gearing is 43%.
DEXUS Property Group (ASX: DXS) – last traded at $9.26, yields 4.7%
One of the cheaper A-REITs, DEXUS trades at a 23% premium to its NTA of $7.53, while gearing is 31%.
When looking at a REIT, there are a number of things to look for, and the 'premium' to NTA should be the first, followed closely by debt load. All companies earn rent on their assets, so if a company's portfolio is earning 5% on its assets, by buying shares worth 150% of the value of those assets (e.g. in the case of Westfield or Goodman Group), all you're doing is ensuring that your relative returns are smaller.
In fact, many companies would sell their assets in an instant if they could get a price 50% higher than market value for them. Buying a REIT isn't as simple as just looking at NTA however, as both Westfield and Goodman command high prices because of development work that is in progress, which is expected to result in significantly higher rental income in the future.
The debt load is an easy one. Too much debt and a company could be forced to divest assets or cut the dividend if something goes wrong. Likewise higher interest rates could eat into profits if debt is high – Scentre Group has over $10 billion in debt. Every 1% increase in interest rates could result in additional payments of $100 million, which would make a dent in profits. I start to get uncomfortable when gearing heads above 40%.
Three other things to look for
- The location of the assets
Prime assets in great locations in capital cities, like those owned by Scentre Group and Westfield, become community focal points and tend to attract the best retailers, which attract more consumers, which leads to higher sales, growing rentals, and good performance over time.
Surprisingly, some property investors can also do very well by investing in rural areas, with the likes of Stockland Corporation Ltd (ASX: SGP) offering attractive long-term returns on centres in under-invested areas like Bundaberg or Townsville. Again, this is because these developers get prime locations. Second-rate locations in areas with lots of competition, or in areas highly dependent on certain industries (eg. mining towns) are rarely as attractive over the long term.
- The type of asset
Does your REIT own retail, commercial, or industrial property or a mix? The characteristics of each property type are different throughout the cycle. For example, rental growth at Scentre Group is pretty much dependent on retailers managing to grow their same-store sales. If rents go up too much without the retailers experiencing corresponding growth, they'll look elsewhere. Likewise retailers are more exposed to consumer wealth and employment levels.
On the other hand, Industrial properties are often let for very long periods of time, providing earnings certainty, and are less vulnerable to consumers. BWP Trust (ASX: BWP) is a commercial investor that owns many of the properties that Bunnings Warehouse is built on. It is obviously very aligned to the success of Bunnings, although it doesn't benefit the same as Bunnings does.
- Where in the cycle is the company/industry at?
This is the hardest one to evaluate. Basically you want to try to evaluate where a company's debt load and development prospects are at compared to the market at large. You might not want to own an apartment REIT at the same time as other companies are churning out thousands of apartments for the Sydney and Melbourne markets. Likewise Goodman Group's debt looks very low, but could easily accelerate once the company starts to invest in a few more developments. Low debt might not look so low in 5 years time, especially if higher interest rates come around.
If you can get a handle on these major concerns, you're well on your way to understanding REITs.
