REAL estate fundamentals have not peaked in Australia and LPTs still offer growth and good value, according to analysts.
Merrill Lynch said LPTs remain attractive when compared to many of its global REIT counterparts, adding the sector provides not only an attractive value but provide both defensive and growth characteristics.
ML said LPTs have held up pretty well up 0.7% this year, unlike global REIT markets which have being in a tailspin, due largely to the realisation that rising interest rates that will affect financing costs, which may have an adverse effect on property values.
For example, the European Public Real Estate Association and the North American Real Estate Investment Trust Global Index has fallen 3.0% this year, due largely to interest rate fears of affecting cap rates.
Additionally, ML noted United States CMBS spreads have widened to 268 bp, a 150 bp increase from levels in February this year.
ML said LPTs will continue to look attractive to global investors because the sector offer the highest yield in the global REIT universe.
LPTs currently provide a yield of 5.2% — 30% higher than Europe and the
ML said the
However, ML said LPTs growth is sustainable because internal growth has been supportive (3.3%), fundamentals have not yet peaked across the board in all
ML noted during the last reporting period, the commercial pipelines for 23 companies grew 20% sequentially to $31 billion, while residential pipelines grew 7% to $70 billion.
“Since that time, the companies that have provided operational updates suggest their pipelines grew at least at a similar pace in 2H07,” the research added.
ML said LPTs still offer steep discounts to NAV. It estimates the average discount to forward NAV for LPTs is 10.3%.
But LPTs is not alone, US REITs are trading at a 12% discount to NAV, while UK REITs are trading at a whopping 24% discount.
“As shown in recent transactions, we do not think the discounts companies are trading to NAV are sustainable. We have seen $16 billion EV in potential M&A transactions, numerous asset sales into joint ventures and funds, and even an LPT (Goodman) buying a significant 9.4% stake in a competitor (IIF), when it thought its shares were trading at abnormally low levels,” ML’s research said.
Lastly, ML said what separates LPTs from other major REIT markets is superannuation fund flows. ML said since the introduction of compulsory contributions in 1992, super has grown at 14% CAGR to $1.011 trillion.
Just last week, Macquarie Bank announced it received $18 billion in super fund flows in the past three months.
ML said since this money is new, it has yet to be spent and LPTs will stand to benefit because both flows into LPT shares and flows into funds managed by LPTs, thus increasing management fees.
Mercer forecast Super FUM will increase from $1 trillion to $2 trillion by 2015 and $4 trillion by 2025 – implying a CAGR of over 10%.
Australian Property Journal