Trends in the listed real estate sector

Perspectives

Trends in the listed real estate sector

A decade in review

Many listed real estate companies are achieving returns in excess of those of the broader market - is this evidence that the turbulent times are behind us and investor confidence is here to stay?

Many listed real estate companies are achieving returns in excess of those of the broader market; however the difficulties experienced during, and after, the global financial crisis are not easily forgotten. Are current returns evidence that the turbulent times are finally behind us? Has investor confidence returned to the sector to stay? Deloitte Corporate Finance has reviewed the trading prices of listed real estate companies over the last decade relative to bond yields, cash rates, capital raisings and transaction volumes.

The property market has been cyclical over the last decade. During the Global Financial Crisis (GFC), listed Australian Real Estate Investment Trusts (A-REITs) traded at substantial discounts to net tangible assets (NTA) due to declining valuations and increasing bond rates, which impacted bank covenants and led to significant recapitalisations.

Click here to see A-REITs: Normalised average premium/discount to NTA, compared to bond yield and RBA cash rates

Recently, most A-REITs and stapled entities have returned to trading at premiums to NTA (the industrial sector rebounded earlier) due to investor perceptions of increasing property values not yet reflected in reported NTA, and the yield differential in cash or bonds vs property. As property valuations are often a lagging indicator, all else being equal, A-REIT’s are likely to trade at NTA only twice in every cycle, i.e. at the equinox.

Click here for Normalised average premium/discount to NTA by sector

Volatility in the premium/discount to NTA has been most evident in the industrial sector, primarily driven by the Goodman Group. All other segments followed a similar pattern.

“The correlation between the share trading premiums/discounts of A-REITs and bond yields reflects the link between interest rates and operating returns.”

John Leotta, Deloitte Real Estate Industry Leader

In 2009 over $12 billion in equity capital was raised by companies in the ASX 200 REIT Index, whilst the market capitalisation of the Index fell to less than $60 billion. Since then equity values have improved and during 2014 $6 billion in capital was raised by the sector, the highest volume since the GFC.

Click here for ASX 200 REIT Index market capitalisation compared to the value of equity capital raised

The ASX 200 REIT Index has significantly outperformed the ASX 200 Index since January 2014. This is due to increasing property valuations and improved financial performance of A-REITs, as well as investor perceptions of the future growth in the sector.

Click here for relative ASX 200 Index and ASX 200 REIT performance

“In contrast with the GFC, recent capital raisings indicate the return of investor confidence to the sector as companies prepare to capitalise on growth opportunities.”

Rachel Foley-Lewis, Deloitte Corporate Finance

Click here for Stapled entities: Cash balances (tracked on a half-yearly basis)

During and just after the GFC, real estate companies accumulated cash through capital raisings, changes in distribution policies and/or a reduction in corporate costs. Deloitte’s The Australian Cash Paradox highlights that in the current market ‘doing nothing’ and continuing to hold on to cash can destroy shareholder value.

Following the GFC, transaction activity in the sector was sporadic, influenced by more fragile investor confidence and capital markets. The volume of corporate real estate and A-REIT transactions rebounded in 2014 (as has investor confidence), with a peak in transaction volume.

Click here for Real estate transaction volume, compared to average premium/discount to NTA

The evidence of trends in capital raisings, transaction volumes, and share price performance shows a recovery in the listed real estate sector and the potential appetite to capitalise on growth opportunities or undertake mergers and acquisitions. However, industry players are still cautious about the times ahead, and mindful not to repeat the mistakes of the past. 

“Companies with significant cash balances, either through recent capital raisings or strong financial performance, are ready (and need to be) to take advantage of key investment opportunities over the next few years. I expect the market will be buoyant for at least the next 24 months.”

Damian Winterburn, Leader Deloitte Real Estate

The evidence of trends in capital raisings, transaction volumes, and share price performance shows a recovery in the listed real estate sector and the potential appetite to capitalise on growth opportunities or undertake mergers and acquisitions. However, industry players are still cautious about the times ahead, and mindful not to repeat the mistakes of the past. 

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