Listed property trusts have started 2015 in the same way they finished last year, with the sector index gaining almost 8 per cent in January.
That gain comes on top of the 27 per cent total return the listed property sector delivered in 2014, as investors bought in to the relative security and reliable yields of real estate.
Along with the January gain, there have been some early signals that the upcoming earnings season will deliver some earnings growth.
In January, shopping centre owners Novion and Federation released trading updates to the end of 2014, showing some momentum in sales growth over the year. Federation has also revalued its portfolio of shopping centres up by 3.3 per cent.
As well, GPT gave an an early taste of its annual result in January. The update revealed a 4.1 per cent increase in funds from operations and a forecast of 5 per cent growth in earnings for 2015.
That forecast was better than many in the market expected. And it came courtesy of the property trust’s underlying operations rather reduced debt costs.
Two industrial funds, the Australian Industrial REIT and the 360 Capital Industrial Fund, which are locked in a takeover tussle, have both issued earnings upgrades.
The good news flow in January comes after distributions increased from the majority of property trusts in the six months to December 31.
Analysts and investors have a sanguine outlook for this month’s results season, amidst a broader re-rating of the sector, driven by low bond yields.
Grant Berry, director at fund manager SGHiscock and Company, said there is little risk of negative surprises in earnings reports this season.
“Leasing conditions are tough particularly in office. Re-leasing spreads in retail are negative. Operational conditions are challenging,” he said.
“But there are reasonably extended lease expiry profileson assets and good occupancy, so we expect stability in earnings.
“The flip side is that the cost of debt has been coming down. That is the tailwind.”
Mr Berry said listed property trusts had a “stellar run” in January –the S&P/ASX 200 A-REIT Index gained 7.7 per cent –helped along by bond yields falling further.
The sector is attracting yield investors, who are being rewarded with some capital appreciation.
“People have talked about the disconnect between values and the market fundamentals. But when fundamentals are very strong –that is high and low rents vacancies –it can also be a time to be cautious.
“People are buying ahead of a recovery. As well, you can’t ignore the cost of debt. The sector is now close to a 17 per cent premium to our internalNAV. It is fully valued in this context. But if you price it in relation to where the bond yield currently is, then this makes the sector look good value.”
“We have a degree of caution –we think the sector islookingfully valued at this point.”
Investors will be looking closely at how much earnings are benefiting from reduced finance expenses and to what extent they flow from robust underlying operations.
Lease expiries and vacancy will be scrutinised in the office trusts’ results. Specialty sales growth and re-leasing spreads will be examined carefully in the retail trusts’ reports. And investors will be especially keen to hear market forecasts from the residential developers.
Morningstar analyst Tony Sherlock said growth in underlying earnings among the property trusts, including retail landlords, has tapered in recent years.
“I expect the moderation in earnings to continue. The preliminary sales data that we’ve got is tepid.
“The positive catalysts will come from a systematic lowering in borrowing costs. It’s not anything management has done.
“I don’t see any reason to break into the higher growth that we saw in the decade to 2010.”
Mr Sherlock said he expected property groups with funds management platforms –such as Charter Hall or GPT – to do best. Westfield and Goodman were being favoured by the falling Australian dollar.
Lower debt costs were helping developers, such as Stockland and Mirvac, who were getting higher prices and better margins on their residential stock.
“Conditions are great for developers. The issue is; how sustainable is it?”