Commercial property and the global credit crunch
Morningstar's Alexander Prineas says Australian REITs are well placed despite concerns of a global credit crunch.
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Concerns about the global banking system have filtered through to listed property stocks amid fears REITs could get squeezed on both sides: by their tenants and lenders.
Real estate investment trusts, or REITs, are companies that develop or buy portfolios of properties, such as office buildings, shopping centres, hotels and apartments.
The properties generate income from rent and capital growth, and the REITs that hold these assets typically carry a lot of debt.
With rising interest rates making that debt more costly, listed property shares have fallen over the past year. The Morningstar Australia REIT index is down 15.8% over the past 12 months, and has lost 6.6% in March alone as the recent banking crisis raised fresh concerns.
But Morningstar senior equity analyst Alexander Prineas says Australian REITs are well placed compared to their global peers.
"Look, everything is connected, and you can get some potential collateral damage from from things that are going on, weakness in the in the banking sector overseas and that sort of thing," he says.
"But if you don't need to sell assets, and you don't need to tap debt markets, and you're continuing to collect that rental income, then I think you're in a lot better shape than a lot of other businesses."
In the case of many locally listed property stocks, Prineas says they have long leases to a strong book of tenants, adequate interest rate hedging, and modest gearing levels - which is a measure of debt relative to assets.
"A lot of the bigger Aussie REITs don't need to tap the debt markets for the next 12 to 24 months so we think they can ride through a lot of these potential ructions in commercial property markets overseas," he says.
And while rising interest rates will hit valuations on their physical property assets, Prineas says this has been priced into the share price of the owners of these assets.
"The big office players is really where we see the biggest opportunities, and essentially the CBD is on special at the moment."
"You can buy them at a 35% discount to the values that super funds hold the assets on their books by accessing the listed REIT space."
He says several Australian REITs hold 4- and 5-star ratings at the moment.
Watch the interview below.
Opportunities among the REITs
Amid the negative sentiment towards property assets, Prineas says some REITs are trading at a 35% discount to where Morningstar sees fair value.
"We do expect the prices on the physical property values to come down, and we've been saying that for probably two years.
"The question is, how much are they going to fall? We don't think they're going to fall as much or as far as is being implied by the security prices of the listed REITs."
He says Mirvac (MGR), Dexus (DXS) and GPT Group (GPT) are among the most undervalued Australian REITs on the ASX.
"You've also got to remember that these big office REITs are diversified. They don't just hold offices, they hold industrial properties that are trading pretty strongly, they hold some retail properties. And they also actually have a lot of intangible value in things like development businesses, or funds management businesses, that's not even captured in that net tangible asset calculations."
Net tangible assets (NTA) is the value of a REIT's assets minus its liabilities.
Want to know more about investing in public real estate? Morningstar's Mark LaMonica and Shani Jayamanne take a deep dive on the topic in the podcast, Investing Compass.
Or read more about investing in REITs below:
Getting exposure to Australia's most iconic malls through the sharemarket