Australian investors are obsessed with property, particularly residential property.
The problem for most people is that you'll be lucky to find any house in a capital city that will generate meaningful net rental returns after factoring in the loan interest costs.
There is a way on the ASX to create income and get exposure to property. Commercial property is a genuine option for investors. Real estate investment trusts (REITs) trade on the ASX and could be a good choice.
One of the biggest REITs is BWP Trust (ASX: BWP). The vast majority of its properties are large warehouses that are leased to Wesfarmers Ltd's (ASX: WES) Bunnings business. Wesfarmers has a significant stake in BWP so the interests of the two are aligned.
BWP released its results on 2nd August 2017 and there were a few positive and interesting takeaways:
- The revenue grew by 1.5%
- The distributable profit grew by 4.2%
- The distribution grew by 4.3%
BWP had 80 properties leased to Bunnings at the year-end with a number of sites up for renewal.
Bunnings has been a standout retail business over the last decade. It's arguably the best retail business in Australia, I'm sure Wesfarmers management would agree with that. This means BWP has a fantastic tenant and is likely to achieve continued rent increases over the coming years.
The problems
BWP has two challenges to deal with.
When Woolworths Limited (ASX: WOW) decided to shut Masters it left a number of warehouses empty. Bunnings plan to move into some of these and move out of six BWP Trust properties. So far, BWP has found some tenants to take over some leases, hopefully the rest can be filled soon.
The other problem is the growth of online retail. Amazon may not end physical retailing overnight but it's not good news for the Bunnings warehouse physical stores' future growth if online sales start taking larger market share.
The yield
The price decline from $3.83 to today's $2.93 has seen the yield increase. BWP currently has a distribution yield of 5.98%. Solid income like this is attractive in a low interest rate environment.
Should you buy?
I think BWP can play its part in a diversified income portfolio but I'm not sure it's going to be a market-beater from here, particularly with interest rates expected to rise over the next year or two.
