Looks like FCL has bought very well into Australand
Towers struggle in tale of three sectors
Property observed Robert Harley
820 words
4 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Robert Harley
The office towers are hard work; the shopping centres show more promise; and the housing projects are pumping.
That's the market view after three weeks of reports from the Real Estate Investment Trusts.
On the financial side, gearing across the sector has risen marginally, but most REITs have cut debt costs and extended maturities.
One surprise was the anaemic valuation growth which does not seem to reflect the strong rises in price seen in the aggressive buying of some assets.
Now the market returns to normal; to selling and buying, starting with the GPT Group's $608 million purchase, to leasing, developing and M&A.
In the office sector, REIT executives used words like "challenging" and "fragile" to describe their position.
Nevertheless, most achieved positive like-for-like income growth. And most pointed to increased tenant enquiry.
"We see more activity in the market for less than 1000 square metres, but there are some big requirements, particularly for IT in Sydney and government in Melbourne," said GPT Group, chief investment officer, Carmel Hourigan.
GDI Property Group managing director, Steve Gillard, said tenants were focused on affordable space, in secondary buildings and locations.
In the shopping centres, specialty retail trading has improved, and seemingly overcome the post-budget consumer retreat. At the same time, the automatic annual rent ensures that net operating income keeps rising.
Peter Allen, the managing director of the largest shopping centre owner and manager, Scentre Group said specialty store sales had enjoyed "sustained improvement" over the past 13 months with July sales up a strong 5 per cent on 2013 figures.
Some tenants, particularly the discount department stores, are still struggling. And new leases are still being struck at rents below previous figures.
But the positive change in the trajectory of tenant trading points to an eventual end to negative lease spreads though it could be two years away, Ms Hourigan said.
Housing was always going to be the stand-out, and the settlements and forward sales, did not disappoint.
Stockland chief executive Mark Steinert said the housing surge which underpinned his profit would continue into 2015 with price growth slowing but volumes and margins improving.
Mirvac chief executive, Susan Lloyd-Hurwitz said her key housing market, Sydney, would grow in price, though not at the pace of late 2013, and in volume, for another two to five years.
UBS, in its report on the results, wrote that the record level of contracts on hand provided earnings certainty for both the 2015 and 201 financial years.
"Project launches continue to be well received by the market providing earnings clarity out to financial year 2017," wrote UBS.
One issue for the housing developers is the difficulty of buying profitable sites in a market where the prices have jumped further and faster than in any other real estate.
Logistics leader Goodman Group is selling sites into the frenzy. Lend Lease flagged the possibility of selling sites, rather, than developing them, if prices accelerate further. On the debt side of the business, the Investa Office Fund , showed the way. It increased gearing, but extended its maturity and cut its debt costs from 5.2 per cent to 4.7 per cent with further cuts to come in 2015.
Despite the fundamentals, most REITS are predicting further earnings growth in 2015. UBS actually upgraded its prediction for sector earnings growth to 6.7 per cent to account for further rises at DEXUS, Stockland, and Federation Centres.
Perhaps the biggest surprise was in the revaluations, Except for some specific situations – such as properties leased to the automotive sector - values rose but the rise seemed subdued compared with some of the excitement in the sales market. UBS noted that the "despite continued hype on asset appreciation given the weight of capital chasing assets and declining total return assumptions, the Net Tangible Asset (NTA) growth across the sector has been underwhelming".
Analyst Grant McCasker suggested two reasons. Valuers always lag the direct market transactions but they are also adjusting valuations to reflect the weak tenancy demand.
"Real estate fundamentals still remain under pressure with cap rate movements not flowing through to valuations," McCasker wrote.
Valuers have pulled back their 10- year growth assumptions; they have extended the downtime numbers; and assumed higher incentives for longer. UBS pointed to the difference between Investa which boosted its NTA by 5.7 per cent compared to DEXUS at 2.9 per cent.
"A large component of this can be attributed to a large amount of leasing activity by Investa at better outcomes than the valuation assumptions."
Across the sector NTA growth -– excluding Westfield Corporation and Scentre Group - averaged 3.4 per cent of which 2.4 per cent net was due to revaluations according to UBS. In essence, the asset backing of the REITs is conservative.
[email protected]
Fairfax Media Management Pty Limited
Document AFNR000020140903ea940001v
Homepage
PR Newswire
