Australian real estate investment trusts, which last year had the biggest price increase since 2006, will see more subdued growth in 2013, said Morgan Stanley.
“The sector’s defensive earnings, attractive yield, ability and willingness to restructure and consolidation have driven 12.7 percent out-performance versus the Australian market,” analysts, led by Lou Pirenc, wrote in an e-mailed note. In 2013, “in the absence of a major downwards correction, we expect REITs to perform more or less in line with the market.”
The S&P/ASX 200 REIT Index climbed 25 percent last year, compared with a 15 percent advance in the benchmark S&P/ASX 200 Index. The REIT index had a total return of 33 percent, compared with a gain of 20 percent for the benchmark.
Charter Hall Group (CHC) led the advance with a 64 percent increase, followed by Goodman Group (GMG), which rose 52 percent and Australand Property Group (ALZ), which climbed 42 percent, according to data compiled by Bloomberg.
Industrial property groups fared the best, driven by Goodman, while retail, led by Westfield Group (WDC) and Centro Retail Australia, also outperformed, Pirenc wrote. Office REITs underperformed, pulled down by Commonwealth Property Office Fund, he said.
Property trusts are now trading at a 6 percent premium to their long-term average and the broader index, which will keep price growth in 2013 in check, he said. Still, dividend yields, at 220 basis points above the benchmark, are “very attractive” and earnings are “relatively resilient,” Pirenc wrote. A basis point is 0.01 percentage point.
Rental growth, which began to wane in 2012, will continue to slow this year and affect asset values, Morgan Stanley said. Still, this will be offset by lower debt costs, “limiting the absolute downside risk to valuation,” Pirenc said.
Some property groups will also boost net tangible assets and earnings through acquisitions, despite a shortage of high-quality buildings and cautious tenants, he wrote.
Demand for office space, in particular, remains under pressure and, with several developments in progress, vacancies could rise, according to the bank. Morgan Stanley prefers Dexus Property Group (DXS), which is exiting the U.S. and reinvesting the capital in Australian office properties.
Retail rents too are expected to fall as tenant margins shrink, although the decline will be checked by existing long-term contracts, Pirenc said. The bank prefers Westfield and Centro Retail, he said.
Industrial property groups that own or build modern distribution and storage facilities will fare well, with Goodman expected to see “superior earnings growth” in 2013, he said.
Home prices will rise as much as 4 percent on a nominal, annualized basis in 2013, and be capped by continued lack of affordability, Pirenc said.
The REIT index has risen 2.2 percent this year, compared with a 1.6 percent increase in the benchmark.
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