Real estate investment trusts (A-REITs) have at times offered a wild ride to investors. But it is possible that they could offer some diversification for SMSFs, especially into non-residential property. Broker SLSA has analysed the reporting season and notes that A-REITs reported an average earnings per share growth in the first half of 2014-15 of +6.7%, with developers and fund managers generally reporting the strongest growth. They say that while the retail sector improves, they have concerns over the office market, which is increasing their bearishness on DEXUS.
Here is a summary of their overview:
"Results summary – resi developers and fund managers outperform
q Residential developers had strong EPS growth with Mirvac (MGR) at +14.4% and Stockland (SGP) at +6.9% from record pre-sales and contracts on hand.
q Fund managers performed well with strong AUM growth and greater property market activity providing increased transaction fees, with Charter Hall (CHC) reporting EPS growth of +10.6% and Goodman Group (GMG) +9.0%.
q Average lfl NOI growth from retail portfolios was +3.0%, a sector best with regional retail improving the most, followed by industrial (+2.1%) and office (+0.3%).
q Low EPS growth was due mainly to dilutive sales, raisings and tough office markets.
Office sector – current development cycle to increase vacancy rates
q A wave of new supply is rolling across the major Australian CBDs and the expected increase in net absorption will probably not be enough to stop vacancy increasing.
q The divergence between weak fundamentals and strong office values is growing.
q Ave lfl office NOI growth has decreased from +6.3% in FY09 to +0.3% for 1H15.
The office markets and DEXUS
q We estimate the Sydney CBD prime office vacancy will increase from the current 8.7% to 13.1% by Dec 2017 (as detailed overleaf), due mainly to excess supply.
q The $7.6bn DXS office portfolio is 88% Prime Grade (Premium and A). The much talked about residential conversions will mainly affect Secondary stock, not Prime.
q While DXS has strong management, a growing FM business, trading profits capability, and a quality office portfolio, our concerns around income fundamentals outweigh. We downgrade DEXUS (DXS) to Underperform."
Here are their preferred exposures:
" We recommend overweight positions in resi developers Stockland (SGP) and Mirvac (MGR) due to their favourable residential exposure, Goodman (GMG) due to its expanding leading global industrial platform and Cromwell (CMW) for tactical office exposure (B-grade office) and funds management growth.
q For retail we prefer Scentre (SCG) as we believe regional centres will outperform, and Federation (FDC) due to future earnings growth and the Novion match up which addresses FDC’s overweight WA (26%) and sub-regional (53%) exposure."
A-REITs may be "uncorrelated" with other kinds of equity investment. Because property is a different asset class to shares, they may not behave the way the rest of the stock market does, providing an element of diversity. But SMSF investors should approach property with caution.