The Australian Real Estate Investment Trusts are not cheap but they will show a healthy total return in 2015 – as long as bond rates stay low.
At least that is the view of CLSA analyst, Sholto Maconochiein his sector outlook for 2015, entitled Macro Matters.
His top picks for the year are Mirvac, Scentre Group, Goodman Group, Stockland, DEXUS Property Group and Investa Office Fund.
At the same time, he downgraded Westfield Corporation, GPT, Federation Centres and Growthpoint from outperform to underperform based on valuations and their strong price growth in 2014.
CLSA estimates a total return from the sector of 11 per cent in 2015, which is a lot less than the 27 per cent in 2014, but still good enough in a low-return world.
The biggest risk, wrote CLSA, is a rise in global bond rates.
On a sectoral basis, CLSA expects B-grade offices, industrial and regional retail centres to be the outperformers of 2015.
B-grade office is CLSA’s preferred sector because it has the highest yields, a wide 170-basis point spread to prime office yields, a decreasing supply as buildings are turned to apartments and an increased number of investors seeking them.
Industrial will also continue to outperform becaue of stable rent growth, low incentives and structural increase in demand from logistics operators and e-commerce.
Mr Maconochiealso expects the big regional shopping centres to outperform because of the flight to quality amongst retailers.
“Residential price growth should slow, with NSW outperforming and Queensland continuing its recovery,” he wrote.
Mr Maconochiewrote M&A would continue, but at a slower pace than in 2015, with Mirvac, the GDI Property Group, the Cromwell Property Group, DEXUS the GPT Property Group and the Charter Hall Group likely to be involved.
He noted an internalisation of the Investa platform would likely put the Investa Office Fund in play with DEXUS, GPT or Blackstone as likely suitors.
And he reminded investors that Westfield Corporation would likely list on the New York Stock Exchange by year end.