REITs will underperform: JP Morgan
Real estate investment trusts will be outshone by the broader equities market globally this year, but shopping centre owners may make some better than expected gains after being heavily sold off according to a new report by JP Morgan.
While global REITs are down 4 per cent on a total return basis in the last 12 months, global equities have delivered a 25 per cent total return.
JP Morgan’s Global REIT Radar report, authored by a team of international analysts led by Ben Brayshaw, argues that the underperformance by the REITs will continue well into 2018.
“Global GDP growth is getting upgraded at the quickest pace in six years. Our caution on the relative performance of REITs globally in 2018 is based on a backdrop of higher forecast GDP growth, lower US tax rates, and central bank normalisation,” the report notes.
US long term bond yields have moved up 50 basis points to about 2.5 per cent since August, and JP Morgan said the prospect of further normalisation should see equity investors prefer exposure less correlated with bonds.
Mr Brayshaw said that was not an “ideal backdrop” but that could change.
“For REITs to be better positioned, there would need to be some kind of shift or crack in equity market sentiment. That could happen as the year plays out.”
One area where there has already been some improvement in the REITs is retail.
Global listed retail landlords have already shown a 2.7 per cent total return in the last two months outperforming global office REITs which were up 0.5 per cent and industrial property REITs down 2.8 per cent.
“We took a positive stance on retail REITs in September when the valuation gap versus the direct market and other property sectors became too great,” Mr Brayshaw said.
“The main driver is the pricing of better quality retail assets in the direct market, and what the equity market is currently implying those assets are worth.”
When looking at net asset values – including the broader business value of retail REITs and not just tangible assets, current share prices are trading at a 20.5 per cent discount in Australia and 22.6 per cent in the US. Globally overall they trade at a 16.8 per cent discount.
Overall REITs trade at 4 per cent discount below net asset value with Australia and the UK at 11-12 per cent discounts.
JP Morgan is also forecasting some strong dividend results too for the retail landlords at 6.4 per cent dividend per share compound annual growth over the next three years.
That is much higher than the overall REIT sector globally where JP Morgan is forecasting dividend per share growth of 5.1 per cent compounding annually over the next three years.
“Its above inflation and shows the underlying income steam is growing reasonably well, we think,” Mr Brayshaw said.
