Property fund market back in favour

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The listed property fund market is moving back onto analysts’ ‘buy’ lists after a disappointing year in 2016/17. Over the past couple of weeks one analyst has changed its sector rating to ‘outperform’, while another has said conditions are right for funds to produce good returns. Of the 77 property funds researched by Zenith Investment Partners, four come ‘highly recommended.

Real estate investment trusts (REITs) listed on the Australian Securities Exchange performed poorly during the 2016/17 financial year, with unit prices falling by an average of 7.3 per cent.

The sector had been a strong performer since 2012, producing returns of more than 15 per cent a year.

Zenith Investment Partners says the sector has faced two problems: rising bond rates and retail disruption.

REITs are viewed by some investors as bond proxies due to their relatively stable income. When bond yields rise there is a tendency for some investors to switch back into bonds from REITs, causing REIT values to fall. This is what happened through part of 2016.

Retail property makes up a significant proportion of REIT assets, and this sector has been disrupted by concerns over the growth of online shopping and weak consumer sentiment.

Macquarie Securities says the sell-off in REITs has gone far enough. In a recent commentary on the sector, it says the dividend-yield spread of REITs to government bonds has blown out from a long-term average of 195 basis points to the current level of 270 bps.

That is, investors will get an average yield 270 basis points higher than the bond yield.

Macquarie has moved its sector rating to ‘outperform’ arguing that as the yield spread moves back to its historical average, total shareholder return will be around 20 per cent.

The REITs it believes will deliver that outperformance include Aventus Retail Fund (ASX code:AVN), Charter Hall Group (CHC), Dexus (DXS), Goodman Group (GMG), GPT Group, LendLease Group, Mirvac Group, Peet Ltd (PPC), Scentre Group (SCG), Vicinity Centres (VCX) and Westfield Corp (WFD).

Macquarie says retail has been a problem sector but not all retail centres a doing badly. It also feels that all the gloom about the arrival of Amazon is priced into REITs already.

Last week, Zenith released its 2017 Property Sector Review, reporting on more than 70 Australian and global property securities funds (a property securities fund invests in a portfolio of REITs).

It says that over the course of calendar 2016, only 20 per cent of Zenith’s rated global REIT managers exceeded the sector benchmark, the FTSE EPRA/NAREIT Developed A$ (Hedged) Index on a post-fee basis.

Only 25 per cent of Australian REIT managers beat the benchmark, the S&P/ASX 300 REIT Accumulation index, over the same period.

It says one of the negative effects of the sector’s strong run from 2012 was that managers have had less opportunity to generate excess returns.

Zenith says that following the sector’s correction over the past year, there is potential for greater dispersion in the market (the difference between the top and bottom performers). In other words, there is more scope for above-benchmark returns from property securities funds.

From a universe of 77 property products, Zenith rated four ‘highly recommended’, 18 ‘recommended’, 10 ‘approved’, one ‘redeem’ and 44 were not rated. There were no upgrades

The two local ‘highly recommended’ funds are Cromwell Phoenix Property Securities Fund and Zurich Investments Australian Property Securities Fund.

The other two are global funds: Resolution Capital Global Property Securities Fund; and Resolution Capital Global Property Securities Fund (unhedged) – Series 2.

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