Real estate trusts set for comeback with yields ahead of the pack
Euree Asset Management manages about $175m worth of funds.
Listed property has produced strong returns after major Australian real estate investment trusts indicated that commercial property markets were turning around, and economic forces now favoured the sector.
We are now more bullish on the prospects for the listed sector over the next period due to the confluence of current and forecast economic drivers which are boosting the outlook for both direct markets and listed real estate groups.
Solid fundamentals in areas including retail and industrial property, combined with the improving outlook for interest rates, have lifted our confidence in the sector.
Euree Asset Management CEO James Hird. Picture: Getty Images
Part of this improvement has been derived from the improving macroeconomic outlook, and at a stock level we have seen that corporate activity is beginning to re-emerge in the sector.
Turning first to the macroeconomic environment, we believe that now is a good time for investors to consider increasing their allocation to property as an attractive asset class investment.
The environment for real estate investment trusts has turned positive for a number of reasons.
Market expectations over coming months, through to the end of 2024, are that the rising interest rate cycle in place over the last 18 months or so will end, with the market moving into a succession of rate cuts as the Federal Reserve in the US begins to lower rates.
Notably, central banks in Europe and Canada have already started to lower rates on the back of falling inflation. In Australia, a similar scenario is expected to play out early in 2025.
Capitalisation rates, on which property values are measured, have risen by around 75 basis points from their June 2022 peak in pricing. They are now thought to have topped out, while gearing ratios appear to have also steadied.
After the June 2024 reporting season, most of the real estate investment trusts have an average gearing of around 30 per cent, representing only a slight increase from December 2023 levels. Transactional activity has picked up over the course of 2024, with increasing interest evident from buyers looking to acquire assets.
Euree Asset Management property director Winston Sammut. Picture: Britta Campion
Excluding the office sector, valuations are considered to have bottomed for the industrial and retail sectors in the expectation that income growth will result in higher asset values.
We are invested in select real estate investment trusts currently trading at attractive discounts to their net tangible asset backing, and some in the sector are considered takeover targets. Last week, Charter Hall and its funds made a takeover offer for listed pub landlord Hotel Property Investments and Lederer has made a recapitalisation proposal for the Elanor Commercial Property Fund.
However, our thesis is not premised on takeover activity. Attractive yields are currently on offer from real estate investment trusts, and they compare well against competing investments, with some trusts offering yields of more than 7 per cent to 8 per cent.
Having regard to these drivers, and accepting that market volatility is likely to remain for some time because of the prevailing investment environment, it is Euree’s opinion that increasing exposure and allocation to the A-REIT sector may well result in producing sound long-term returns for investors.
James Hird is CEO at Euree Asset Management and Winston Sammut is property director at the group.
