Australian Property Revives With Payouts

Australian property companies are among the top of the class in 2014, a turnaround from five years ago when they were the stock-market stragglers, as higher payouts and low volatility lure yield-hungry investors.

The industry offered the second-best risk-adjusted return among 11 subsectors in the benchmark S&P/ASX 200 (AS51) Index, behind only utilities and beating groups including miners and banks, the BLOOMBERG RISKLESS RETURN RANKING shows. Property companies have both the second-highest total return and the second-lowest volatility of all the groups.

Australian real estate companies are reaping the rewards of a return to their rent-collecting roots following failed overseas expansions that left them with billions in losses in the wake of Lehman Brothers Holdings Inc.’s 2008 collapse. After selling risky overseas assets and cutting debt, they’re benefiting from rising property values, including an 11 percent increase in home prices in the nation’s biggest cities over the past year, and rewarding shareholders amid record-low interest rates.

“Many of the bigger players, they’ve all got an earnings stream coming from development, and they’ve got their property management arm as well” providing stable rental income, said Evan Lucas, Melbourne-based market strategist at IG Ltd. “And property prices are on their way up.”

Photographer: Brendon Thorne/Bloomberg

Westfield, the nation’s biggest shopping-mall operator, and its managed Westfield Retail Trust, which together make up a third of the index, offered total returns of 8.2 percent and 9.7 percent, respectively, with volatility of 17 and 15. Close

Westfield, the nation’s biggest shopping-mall operator, and its managed Westfield... Read More

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Photographer: Brendon Thorne/Bloomberg

Westfield, the nation’s biggest shopping-mall operator, and its managed Westfield Retail Trust, which together make up a third of the index, offered total returns of 8.2 percent and 9.7 percent, respectively, with volatility of 17 and 15.

Low Volatility

The strong performance by property companies may eventually fade if sluggish rental growth for offices and warehouses, combined with future interest-rate increases, crimps profits and boosts the appeal of other income investments, said Paul Xiradis, who helps manage about A$10 billion ($9.4 billion) as chief executive officer of Sydney-based Ausbil Investment management Ltd.

The S&P/ASX 200 Real Estate index comprises 19 companies with a combined market capitalization of about A$101 billion, accounting for 6.8 percent of the S&P/ASX 200 index. The property index rose 1.3 percent today, while the benchmark index fell 0.3 percent.

The property sub-index had volatility of 10.117 this year through June 16, compared with the technology group, which was the highest at 18.968. Real estate companies returned 10 percent this year, compared with the benchmark’s 3.8 percent.

Five years ago, real estate companies were at the other end of the scale, with the worst returns when adjusting for price swings and the third-highest volatility of any industry in the nation in the year ended June 30, 2009. That followed a global buying spree, fueled by Australia’s A$1 trillion of pension savings and cheap debt, that made the country the biggest overseas acquirer of U.S. properties from 2005 to 2007.

Expansion Debacle

Their expansion strategy backfired when property values tumbled and borrowing costs spiked in frozen credit markets. That left the trusts unable to refinance maturing debt and forced them to issue shares at steep discounts to fund repayments. Australian real estate investment trusts reported combined losses of about A$20 billion and took almost A$22 billion in property writedowns in the year ended June 30, 2009, and lost about A$60 billion in value in less than two years, according to data compiled by Bloomberg.

Since then, they’ve steadily won back investors’ favor through sales of overseas and lower-quality assets, refinancing debt at cheaper rates and largely returning to a focus on being Australian landlords.

Selling Assets

GPT Group (GPT) is the best performer this year among the 10 largest property companies by market value. The real estate investment trust, which reported a A$3.3 billion loss in the 12 months ended Dec. 31, 2008, had a A$572 million profit in 2013. Debt on the Sydney-based company’s balance sheet and held by managed funds fell to 23 percent of assets as of Dec. 31 from 47 percent five years earlier.

Australia’s second-biggest diversified REIT sold assets including U.S. retirement villages valued at $890 million, and in 2009 exited its partnership with the biggest Australian casualty of the financial crisis, Babcock & Brown Ltd. The company has since sold those joint-venture properties, which, valued at A$6.5 billion in June 2008, included loans and European and U.S. residential and commercial properties, to focus solely on its Australian operations.

“When I arrived at GPT in 2009, I set out a clear path to clean up, stabilize and then optimize the business,” Michael Cameron, the company’s managing director, said by e-mail. “The group continues to pursue growth opportunities having increased the size of its funds management business by 7.5 percent and securing acquisition rights over a further A$1.2 billion in retail and office property, earlier this year.”

Mitigating Risk

Those that still have overseas operations and development arms -- including Westfield Group (WDC), Lend Lease Group and Goodman Group (GMG) -- do so in markets they know well or in joint ventures with local operators. They also focus on locations with growth prospects and sign on tenants and investment partners before beginning work.

“The Australian REIT sector is now a pretty low-risk sector, with most of its income coming from contracted rent,” Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios, said in a phone interview. “Their outperformance is probably also reflective of bonds now, bond yields having come off, and that’s supportive for property companies’ yields.”

The Australian 10-year government bond yield fell 47 basis points, or 0.47 percentage point, this year to 3.74 percent as of June 16. The real estate index offers a dividend yield of 5.1 percent, the highest after the telecommunications group, and above the average 4.4 percent for the benchmark index.

Westfield Restructure

The risk-adjusted return, which isn’t annualized, is calculated by dividing the total return by the volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Real estate companies returned a risk-adjusted 1 percent in 2014, compared with 0.4 percent for the benchmark.

Westfield, the nation’s biggest shopping-mall operator, and its managed Westfield Retail Trust (WRT), which together make up a third of the index, offered total returns of 8.2 percent and 9.7 percent, respectively, with volatility of 17 and 15.

Westfield Group shareholders voted last month in support of a proposal to merge the company’s Australian and New Zealand operations with Westfield Retail Trust to create a new company, Scentre Group. If the retail trust’s shareholders vote in favor of the restructure on June 20, it would allow Westfield to focus on higher-return activities, such as development, in markets including the U.S. and U.K., where sales at its malls are growing faster than in Australia.

Central Bank

The Reserve Bank of Australia has cut interest rates 2.25 percentage points since November 2011 to a record-low 2.5 percent to stimulate industries such as building as mining investment wanes. The central bank, which has held the benchmark rate at that level since August, on June 3 said the impact of the cuts could be seen in a pickup in housing construction and an improving labor market.

Economists are forecasting the rate will rise to 2.75 percent by the first quarter of 2015, according to the median of 27 estimates last month compiled by Bloomberg.

“REITs are regarded as a relatively high-yielding sector so if you have rates increasing, as yields go up, their valuation becomes less appealing,” Xiradis said. “And you’ve got some pressures on commercial property rents, so distributions may be under a bit of pressure as time goes on.”

Dividend Increase

Dexus Property Group (DXS), which offered a 0.7 percent risk-adjusted return, on May 7 increased its forecast dividend payout to 6.26 Australian cents a share from its Feb. 12 forecast of 6.24 cents, after completing its takeover of Commonwealth Property Office Fund. Dexus’s assets under management have risen to A$17.6 billion from A$14 billion as of December 2013.

“At the moment, if you have a look at your Charter Halls, your GPTs, your Dexus Groups, that have exposure across the board, they’re doing OK,” said IG’s Lucas. Even as an increase in interest rates “will hurt the hip pocket, it’s not going to slow the market dramatically to really weigh it down.”

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net Iain McDonald, Josh Friedman

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