YES yields are very attractive but investors should not be rushing back to the A-REITs sector yet. According to independent analyst Advisers Edge, the sector has not reached the bottom and some trusts may enter into bankruptcy.
Advisers Edge which has upgraded its recommendation for the S&P/ASX 300 A-REIT Index from underweight to neutral, cautiously warned that the market remains highly volatile.
Head of property research Louis Christopher acknowledge that the dramatic fall in stock prices during the current downturn have yields have become increasingly more attractive. The current yield of A-REITs has been recorded as well over 20%, calculated as dividend payments over the last 12 months above the current price.
But he added, such analysis does not consider the heavy distribution cuts that have been taking place, and the effect that these will have on yields in the coming year.
“On a 12-month forward basis, with respect to analyst consensus, the weighted average figure is closer to 12%. While a yield of 12% does remain quite attractive relative to regular equities, Adviser Edge notes that the analyst consensus figures used will likely be subject to heavy revision as cash flow pressures further reduce distribution payments.
“Distributions have been cut and are likely to be cut further as occupancies fall and banks demand their cash first before investors receive distributions. Adviser Edge believes that the uncertainty/negativity over distributions is likely to last up to two years from this point,” he added.
Christopher said substantial risk remains for the sector in short-term.
“Economic and direct property fundamentals have continued to deteriorate through the latter half of 2008 and the first quarter of 2009.
“Underlying asset capitalisation rates have deteriorated during the December 2008 reporting period, with many listed entities reporting softening of approximately 1% of these rates on their direct property holdings.
“However, Adviser Edge believes that these revaluations have not been representative of the full extent of market movements,”
Christopher also pointed out to the June 2008 reporting period, where many A-REITs fell short of investor and analyst expectations on earnings and distribution payments.
“Through to April 2009 the market declined a further 47.1% from its June 2008 low, with some stocks underlying the index suffering price decimations of over 90%,”
After a peak market capitalisation of $137.7 billion (for the S&P/ASX 300 A-REIT Index), the rapid erosion has seen the market cap shrink to $47.5 billion as at April 2009.
He also argued that the additional capital raisings would further dilute the market and increase probability of under-performance in the long-term.
“A lack of transactional evidence and touted strong rental growth have been cited by some A-REITs to defend asset values being held steady on their balance sheets, or only marginally written down.
“However, it is believed that the lack of transactions is itself a sign of market weakness and that ‘strong’ rental growth calculated on face value rents does not reflect the substantial incentives being granted to tenants to entice them to renew leases.
“On aggregate, it appears as though the market has priced in a far stronger softening of capitalisation rates, in the order of 2% to 3% from the direct market’s strongest valuations. Despite these signals from investors, pressure from creditor covenants relating to debt as a proportion of the value of real estate on most A-REITs’ balance sheets is a strong deterrent for A-REIT managers looking to recognise write-downs of their properties.
“This pressure is perhaps most noted in the actions that many A-REITs have taken to suspend, or greatly reduce, dividend payments. Earnings are being retained en masse in an attempt to assuage creditor concerns, often by voluntarily paying off portions of drawn debt and thereby reducing gearing ratios,”
Christopher said residential developers and plain vanilla A-REITs are trading at deep discounts favourably.
“However, Adviser Edge also strongly believes that investing in A-REITs with low gearing and the lowest prospect of bankruptcy would be prudent.
“The probability of bankruptcy within the sector is slowly reducing. Forward yields suggest that the market is very cheap, although they should still be treated with scepticism,” he concluded.
Australian Property Journal
