Today, I'm speaking to Pete Morrissey, Fund Manager for Real Estate Securities at APN Property Group and he's going to talk to me about the A-REIT market in 2019 and some of the opportunities that he's seeing.
Pete, it's so great to have you here. How are you?
PM - Good. Thanks for having me.
VT - No worries. So Pete, why don't we talk about the 2019 outlook?
What's happened to the A-REIT space this year and what does that mean for the 2019 performance of the market?
PM - Sure. Well, 2018 we've seen there's been a tough market, I think, across the board for all asset classes, but what we're seeing, I think, is retail performing relatively well, compared to the broader market. And that's probably what you would expect.
They generally are more defensive through tougher times, and so that's probably a real opportunity for investors to consider. That REITs are going to be very solid because of that reliance of the majority of REIT to return coming from income, as opposed to capital growth.
VT - Right. OK, so in 2019, are you saying, I guess, rents increasing and perhaps, yields increasing? Is it going to be a capital growth story? What are you yep?
PM - As far as rents go, you get a deviation. And that's probably the beauty of the REITs themselves, is that you've got the primary sectors being offered as retail and industrial, and they all operate at different levels, at different stages in the cycle, so office has obviously, performed very well.
From a rental growth perspective, you don't have to look at the AFL too often to hear stories about the very high occupancy rates here and the level of rental growth that's occurred. That's going to continue into 2019.
The real strength of the office cycle right now is the fact that there hasn't been a lot of new development and in Sydney and Melbourne we're only going to start seeing later 2019, 2020 onwards, so the cycle benefit of REITs is that they take out some of the noise from the economic cycle, due to the length of the lease term. Renewing tenants are going to be facing high rents going forward.
VT - So office seems to be.
PM - Office is pretty well-positioned and I'd say similar for industrial, obviously. You look at the distribution centres and logistics are in very high demand, and those types of assets are performing very well.
We haven't seen a lot of rental growth in industrial, in general. It's been moving along at a very sustainable level and we see much of the same in 2019.
VT - OK, so before we talk about some specific investment opportunities, I want to hone in on industrial.
One of the pieces in the APN website blog that fascinated me was just the amount of people moving to Sydney and Melbourne.
The figure you quoted was about 32,000 new people calling Sydney their home every week and just about 2,300 for Melbourne. What does that mean from an industrial property opportunity perspective?
Why is industrial property an opportunity when the population is booming?
PM - Sure. Well, probably in regard to industrial, I think the flow-through benefit is that all aspects of the A-REIT market benefit from the demand increase that comes from population growth.
So be it office, retail, industrial, service stations, aged care, healthcare, they all benefit from this growth that's occurring. Industrial obviously, through the demand for new logistics centres and distribution centres that perhaps, provide goods for supermarkets. That demand is there, and so, that's underpinning the amount of growth that's occurring, so you'll note that in residential or commercial property are the best performing.
Markets have been Sydney and Melbourne, where there has been the most significant population growth, so even right now in the residential market, things are very tough. The effect of it will help that market find a base, will be the fact that there's a lot of population growth coming through immigration that will help underpin that market at some stage in the future, and we feel that the population growth that's going on in Australia will continue to underpin the commercial real estate markets, as well.
VT - OK, OK, so let's turn to some investment opportunities.
So when I look at the data on nabtrade, it's really the self-managed superannuation fund investors which they love A-REITs. Like you mentioned, it's that reliable yield. Those yields are generally underpinned by fixed long-term tenant contracts and they rise year on year typically.
So, what are some attractive investment opportunities that you're investing in to capitalise, I guess, on those commercial, industrial, office opportunities that you can share with our audience?
PM - Sure. Well, AREIT Fund currently provides a 6.4% yield, and that's underpinned by some really great small-cap AREITs, so what we're seeing is the likes of Centuria, Aventis, Cromwell providing yields in the 7%-8% range, so very, very strong yields.
Then you've got other names like Stockland, which has clearly been knocked around with headwinds this year from both residential and retail, but currently, that's providing investors with over a 7% yield, so they can afford I think, to position themselves and wait in a name like that for market conditions to improve. You've got names like Unibail, which is that most of this is seen as the original Westfield, so that's flagship centres in the US and Europe. Very, very high quality, arguably the best quality in the world, and right now, that's trading at close to an 8% yield, because of the fact that people, investors don't know how the merger is going to come together. They've had some concerns around that and then, the structural issues around retail that they perceive right now.
So, the sentiment towards that type of name is very weak, yet you can pick up this very strong yield.
The fundamentals of that trust are very, very strong, so we see great opportunities there. If you are concerned around retail, the non-discretionary focused names like so the Charter Hall Retail provides a 6.5% yield right now, so you know, people will have to go shopping, to supermarkets all the time.
VT - It's Christmastime.
PM - Exactly. But they're going to be at supermarkets, because it's non-discretionaries being focused, so that's very, very strong, as well. So, there is great opportunities in there.
Obviously, office names have been a little, the yields are lower because you know, that's Sydney and Melbourne markets, you know, GPT and DEXUS as examples, are sub 5% yields right now. So those names are you know, at lower yielding and are reflection of the different stage in the cycle that office is at.
You've got Goodman which is sub 3% yield, so it's priced very, very finely, I suppose, but you know, a great REIT, but it is a lot of corporate-focussed earnings and a lot of offshore. So we'd prefer names like Centuria Industrial and Industria REIT, which are over 6% yield, coming out of Australian industrial real estate.
VT - What are the risks that there might be some economic pressure on those yields?
PM - Probably, the REITs are always perceived around there being a risk around high-interest rates. It's just the effect of the matter of the way it is, yet a lot of people seem to lose sight of the fact that REITs have really evolved in the management that they did and you know, personally, I think they're best in class across a lot of sectors.
Right now, the gearing in the REIT sector are at 26% at its lowest level since 1999, so very, very low. The tenure of the debt is close to almost double what it was ten years ago, as they focus on lengthening that term, which provides security.
VT - So lower debt, longer pay-off time.
PM - Exactly. If much longer, the gearing levels are low. The amount of hedging that's in place is much higher right now, and a lot of REITs, which shows their defence of really strong management. They have a guided range of gearing that they'd like to operate toward the lower end of that gearing range.
Right now, they could be buying assets secretively, but they're being very, very defensive in the management of their debt, so I think they're well positioned in that regard. Another risk, I suppose, is to the rental side of things, and as I said, I think office is pretty well-positioned, industrial looks pretty steady and sustainable. Retail, we sort of look at it as a barbell that the flagship centres are very, very well-positioned.
The occupancy rates are very, very high, so they're going to continue to do pretty well. And the convenience neighbourhood type centres that you go to every day are going to continue to do well. Transactional market for both ends is very strong. It's sort of that those assets in between could be the ones that sort of see some pressure going forward.
We've sort of seen that a little bit, especially in high streets and pleasingly for us, we're not exposed to those types of assets at all, but we're seeing very high vacancy rates in the high street retail and a lot of rental at big decline in the amount of rent that's been collected.
VT - OK Pete, thank you so much for coming in to speak to me. I always learn so much when I talk to APN Property Group, so I really appreciate your time.
PM - Thank you.
VT - No worries. I hope you enjoyed this video.
Now, please remember what we talked about isn't investment advice. If you're thinking about investing in any of the securities that Pete mentioned or even looking at the APN Properties Securities Fund on the ASX mFund Service, it's really important that you do your research and please consider seeking financial advice.
My name is Vishal Teckchandani. All the best. Happy holidays and I'll see you next time. END OF INTERVIEW