AN OVERVIEW OF THE A-REIT MARKET

23 Sep. 09

This is a rough overview of the A-REIT (Australian) market over the last couple of years. I will essentially present it via charts and tables with a small commentary section.

VISUAL LANDSCAPE OF A-REIT MARKET

Chart 1:

In chart 1, you see a 5yr chart of A-REIT price action as reflected by the index on the left axis. I have superimposed the weekly volatility of the price action as measured on the right axis. You can clearly see the extreme in volatility at the March 09 low.

For sake of comparison to the Global REIT market I have created a relative chart 2, which compares the performance of A-REITs to Global REITs. The dotted black line is the mean of the relative ratio. What is clear is that the A-REITs have clearly underperformed in the last year stretching the ratio more than 2 std deviations away from the mean. Assuming reversion to the mean, Australia offers relative value.

Chart 2.

Using similar logic to the previous chart let us now look at the relative performance of A-REITs to the SA REITs as measured by the JSAPY index. Clearly Australia has underperformed the SA market to a slightly lesser extent than the Global Index.








Chart 3.

 

 

 

A-REIT STATISTICS

In this table you can get a feel for the hammering in market cap the sector has undergone.

	Free Float	Div	Total Real Estate
	Mkt Cap - AUD (million)	Yield	v Listed Real Estate
Mar-07	$121,451	5.36%	38.66%
Jun-07	$124,938	5.56%	38.66%
Mar-09	$40,847	13.84%	33.62%
May-09	$48,546	13.69%	32.71%
Aug-09	$72,928

• The average gearing level across the sector at the end of June 2009 was 31.4% compared to 43% at the end of 2008.
  
• JP Morgan anticipate a further A$8.1bn in write offs over the coming 12 months.
  
• Available liquidity is enough to cover the next 2 years of debt maturities.
  
• Bank lending is currently around a margin of 400bps.
  
• Current valuation cap rates on average 7.9%
  
• Development pipeline over the next 2 years has been slashed to rough A$5.1bn, 45% is applicable to Westfield.
  
• A value of A$12.4 billion traded in August 2009.
  
• Goldman Sachs today lowered their expected dividend yield on the sector for 2010 to 5.4% which is below the 10yr government bond yield of 5.8%.
  

Conclusion

The sector has clearly undergone a massive correction from its 2007 highs. Since March 2009 the sector has rallied some 72%. Clearly there remain valuation question marks; going forward dividend earnings are under pressure and the sector is expensive relative to the bond market. On the positive relative to the global REIT space and South Africa AREITs are cheap.