MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at ASX REITs. 

Today we hear from Alexander Prineas who is a REIT analyst at Morningstar.

Stockhead last spoke with him at the end of 2020 about the year it had been for the sector, and it was a tough one with many losing income. Consequently, share prices fell.


2021 v 2020 for ASX REIT investors

Has 2021 been any better for ASX REITs?

Prineas told Stockhead yesterday for some REITs it has been but it depends on where in the market you look.

“2020 was a tough year [with] significant negative returns and significantly behind the broader equity market,” he said.

“2021 – there’s been a decent recovery but property stocks this year have been in line with the overall market, so although there’s been a recovery they haven’t made up the underperformance they delivered in 2020. So since the pandemic, property investors are still behind the broader equity market.”

While some sub-sectors have been strong, their performance has masked underperformance elsewhere in the sector.

Goodman (ASX:GMG) and Charter Hall (ASX:CHC) are roughly a third of the ASX 300 Property Index,” Prineas said.

“They are up even from before the pandemic so if you remove the performance from them, the more traditional property trusts are more down than it might appear if you look at the index returns.”


What about income distributions?

One of the key reasons to invest in ASX REITs was the certainty of income no matter what the share price did.

But COVID-19 turned that principle on its head.

“In terms of income 2020 was about many property trusts suspending distribution because their income was impaired, the outlook was unclear and for prudence reasons they suspended distributions,” Prineas said.

“2021 is different, most REITs have reintroduced but at a lower level and without forward guidance or forward guidance at a lower level.

“But we still think there’s room for those distributions to recover, maybe not to levels before the pandemic but still significant room for recovery just as the outlook becomes clearer and their income is restored.”

“We still expect recovery in income but we don’t advise investors to use one-year dividend yield metrics as a guide to valuation or risk or outlook at the moment.

“You have to dig a bit deeper because incomes are so changeable – either up or down – and the price volatility. If you’re looking at one-year forward dividend yield it can be misleading.”

So which ASX REITs are in a good position now?

“We think property fund manager names have been darlings of the market,” he said.

“We think they’re good businesses but the valuations are stretches so we prefer names that are contenders in that space.”


Lendlease (ASX:LLC)

Prineas named Lendlease as one such contender.

“It is an established property fund manager but is also a developer, it has property rental income and it’s also been exiting out of its engineering business,” he said.

“So it’s had a number of legacy losses, related particularly to its engineering business.

“And as it drops those losses out over time (as we expect will happen) – and also as it grow more annuity like income streams as it grows its fund management and development businesses as a proportion of income – we think Lendlease has a lot of potential.

“But we see property market as fairly valued to over-valued, so the names that are still looking cheap, they have a few issues or problems in part of the business.

“And in some cases the market is overly penalising or overly cautious because of that – Lendlease is one of those.”

Lendlease (ASX:LLC) share price chart


Cromwell Property Group (ASX:CMW)

“Cromwell is another because of its high debt and European retail property that it is trying to sell,” Prineas said.

“With Cromwell though we don’t view it as undervalued as Lendlease; it is below our fair value estimate but not a huge margin of safety in it because of the risk with the name because of its debt.”

Cromwell (ASX:CMW) share price chart


How have interest rates impacted ASX REITs?

Anyone choosing to invest in the property market cannot ignore the impact of interest rates and the boom it has created and Prineas says ASX REITs have seen an impact too.

“People talk about [REITs] as a bond proxy if yields go down – the discount rates goes down so that is a positive for their valuation,” he told Stockhead.

“They’ve taken a big hit to their income so their earnings are down from pre-pandemic levels, but discount rates have also come down significantly, so that’d had a cushioning effect.”

But what will happen when interest rates rise? Could if offset the effect of any recovery income?

Prineas thinks that’s on the mind of some investors but what’s most peculiar is that many ASX REITs are trading at significant discounts to their Net Tangible Assets (NTAs), even when physical assets have increased in value.

“We prefer the listed REITs over the fund managers because we’re scratching our heads wondering why would institutional investors and sovereign wealth funds be buying direct property office towers – basically buying into property fund management funds offered by fund managers at the book value for the buildings – in line with NTA which haven’t come down?

“Why buy into those when they can buy REITs which are at a significant discount to NTAs?

“We think NTAs should come down a bit because of their link to income but so far the physical market has held up.

“Why would they buy physical assets or buy into a fund when a listed REIT is at significant discount to NTAs?”


Are the new breed of ASX investors choosing to invest in REITs?

Since COVID-19, many investors have gotten into the market for the first time – a trend particularly pertinent in other spaces. Other more experienced investors have readjusted their portfolios.

Prineas says there is some evidence of this although ASX REITs are far from the most popular asset for such investors to invest in.

“There’s definitely an element, it’s not to the same extent you see in the ETF space or with some of the hotly discussed tech stocks like Afterpay (ASX:APT) that are all over the Reddit forums and so on,” Prineas says.

“A lot of retail investors still remember the pain and damage they experienced in the GFC. Listed property stocks were popular with investors until the GFC and they are still an area of interest but nowhere to the same extent.

“So I think the big effect of retail investors getting into the market in 2020 and 2021 hasn’t been felt as much in listed property.

“Potentially in direct property because the performance there has remained strong because those prices haven’t been marked down.

“As unfortunate as it is, quite often investors will chase whatever was performing well in previous year, so with direct property having held up well it could well be investors are chasing historical returns but it doesn’t mean that’s going to return well in the future.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.