Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 268

A-REITS are looking at M&A activity again

The 2018 financial year, like the previous few years, turned out to be a security picker's market in the listed property, or A-REIT, sector. Performance varied across the 31 stocks in the S&P/ASX300 A-REIT Index, ranging from Propertylink up 34.4% to Stockland Group down 3.6%.

Even within sectors, the performance variation was wide. Among the retail A-REITs, SCA Property Group took line honors with a total return of 18.4% while Aventus, the specialist large format retail centre owner, underperformed with a total return of just 4.7%. It was a similar story in the office A-REITs, GDI Property Group returned 33.8%, while Dexus returned just 7.5%. Among the diversified A-REITs, Abacus returned 25.5% and Stockland negative 3.6%.

Overall, the S&P/ASX300 A-REIT Accumulation Index finished FY18 on a high, returning 13.2%, in line with the broader equities market, with the last three months delivering a strong return of 9.8%. The strength in the A-REIT sector coincided with rising concerns of an escalation in a trade war between United States and China, political tensions in Europe, a pullback in US bond yields and the flattening of the Australian yield curve.

Office and industrial up, residential steady

In the current reporting season, valuations are up and earnings guidance ranges have narrowed towards the upper end supported by solid rental growth across most office and industrial markets. Notwithstanding the broader market concern about the weakening residential sector, strong settlements were recorded across the Stockland, Mirvac and Ingenia residential portfolios.

Darren Steinberg, CEO of Dexus, was on the money when he recently said:

“It is pleasing to see higher market rents being reflected in our latest round of valuations across many of our assets. In addition, valuers have taken into account recent transactions where there has been no softening in the underlying investment demand for good quality office and industrial properties which continue to attract a variety of domestic and offshore buyers.”

Looking ahead, we expect corporate activity to remain elevated reflecting many A-REITs' inability to acquire assets in the direct market at reasonable prices. Finding bargains is next to impossible at this point in the cycle, and to grow, A-REITs are now looking to M&A. And we’ve seen this play before. Back in 1999-2000 and again in 2006-2007, M&As became defining factors in a relative hot property market.

Also, the lower Australian dollar is making the valuations of A-REITs increasingly attractive to foreign acquirers (note the Unibail-Rodamco acquisition of Westfield Group, Blackstone’s bid for Investa Office Fund, and Brookfield and Hometown’s fight for Gateway Lifestyle).

A-REITs trading at the smallest premiums or discounts to NTA will be most prone to being merged or taken private.

Overall, we expect the A-REIT sector to deliver relatively attractive returns given the continued low domestic interest rate environment. The two wildcards are the impact of more M&A activity and A-REITs, like interest rate sensitive sectors, being susceptible in the short term, to any major sell-off in global bond markets.

A-REITs owned by asset allocators

Unfortunately, short-term volatility is now a permanent feature of the A-REIT market. With more of the A-REITs being owned by general equity funds, hedge funds and global investors, the sector is more susceptible to the gyrations of these investors, who move in and out of the sector, at a whim. In January and February 2018, the A-REIT sector returned negative 3.2% and negative 3.3% respectively, as concerns about rising global inflation pushed global bond yields higher. Fast forward to May and June, when concerns about rising bond yields abated, the A-REIT sector rallied, with returns of 3.0% in May and 2.3% in June.

In such an environment, as an active manager that doesn’t follow the weighting of each A-REIT security in the Index, we favour those stocks with exposure to the social infrastructure and specialised property sub-sectors, selected real estate developers and managers that have growing funds management platforms. We also like securities with quality management and relatively attractive yields that have the ability to actively manage their portfolios to drive income growth. Not all A-REITs will perform the same.

 

Winston Sammat is the Managing Director of the Folkestone Maxim A-REIT Securities Fund. Folkestone is a sponsor of Cuffelinks.

For more articles and papers from Folkestone, please click here.

 

1 Comments
Fundie
August 23, 2018

Not to mention Charter Hall buying Folkestone ...

 

Leave a Comment:

RELATED ARTICLES

Listed property headlines disguise full story

Focus on quality yield, not near-term income

State of play in listed real estate

banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

The greatest investor you’ve never heard of

Jim Simons has achieved breathtaking returns of 62% p.a. over 33 years, a track record like no other, yet he remains little known to the public. Here’s how he’s done it, and the lessons that can be applied to our own investing.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

Latest Updates

Shares

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Property

Baby Boomer housing needs

Baby boomers will account for a third of population growth between 2024 and 2029, making this generation the biggest age-related growth sector over this period. They will shape the housing market with their unique preferences.

SMSF strategies

Meg on SMSFs: When the first member of a couple dies

The surviving spouse has a lot to think about when a member of an SMSF dies. While it pays to understand the options quickly, often they’re best served by moving a little more slowly before making final decisions.

Shares

Small caps are compelling but not for the reasons you might think...

Your author prematurely advocated investing in small caps almost 12 months ago. Since then, the investment landscape has changed, and there are even more reasons to believe small caps are likely to outperform going forward.

Taxation

The mixed fortunes of tax reform in Australia, part 2

Since Federation, reforms to our tax system have proven difficult. Yet they're too important to leave in the too-hard basket, and here's a look at the key ingredients that make a tax reform exercise work, or not.

Investment strategies

8 ways that AI will impact how we invest

AI is affecting ever expanding fields of human activity, and the way we invest is no exception. Here's how investors, advisors and investment managers can better prepare to manage the opportunities and risks that come with AI.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.