The current fall of Australia’s falling house prices have been well documented. Now that prospective borrowers can’t afford as much the house prices may not be as high for a while.
This is a particularly bad situation for investors considering they started their investment with a negative cashflow. People seem to think that’s good for tax reasons – but you’re still losing between a half and two thirds of what you outlay and never get it back. It’s getting even worse with most banks raising interest rates due to the US rising rates.
However, I can understand if investors don’t want zero exposure to property. It’s a huge asset class. Maybe commercial property would be a better choice.
We can access some fantastic property assets on the ASX with real estate investment trusts (REITs).
I’m generally not a big fan of shopping centre or office properties, but I think these two REITs could be good long-term options:
National Storage REIT (ASX: NSR)
National Storage is the largest self-storage provider in Australia and New Zealand with 130 centres. It is steadily acquiring more storage locations in suburbs or smaller cities that it isn’t already located. The latest acquisitions were in Townsville, Mornington, Wellington and Hamilton.
The REIT has steadily increased its underlying earnings per share (EPS) each year over the past few years. It has definitely benefited from Australia’s property boom. The value of its locations have increased and it also can charge more per square metre.
Its revenue per available square metre (REVPAM) has increased from $202 at June 2016 to $216 at December 2017. Occupancy has also been steadily increasing across its total portfolio.
National Storage currently has a distribution yield of 5.5%.
Arena REIT No 1 (ASX: ARF)
Arena is one of the largest childcare landlords in Australia, it also leases a few buildings to Primary Health Care Limited (ASX: PRY).
One of my favourite things about Arena is that it has a 100% occupancy and its weighted average lease expiry (WALE) was 13.1 years at its half-year report. This provides excellent stability. Its tenants are major operators such as Goodstart Early Learning, Affinity Education and G8 Education Ltd (ASX: GEM).
You can’t expect strong organic growth from REITs, but Arena was able to achieve an average like-for-like rent review increase of 2.5% in the December 2017 report. In FY19 the majority of rents are fixed, or greater of 2.5% of CPI.
Arena has a conservative balance sheet compared to most other REITs on the market. Its gearing fell from 27.5% at June 2017 to 24% at December 2017.
Arena pays a quarterly distribution adding up to a trailing 5.8% yield.
Both REITs are likely to be decent income shares over the coming years. My major worry for all property assets is that rising interest rates will increase the interest expense and perhaps reduce the value of the buildings.