Listed property players tipped for big buys in 2020

On average, the REITs are trading at a 6.3 per cent premium to the issue price of those capital raisings, with just three of the 30 deals under water, on the JPMorgan analysis.

That performance has whet the appetite of hedge funds while domestic investors have bought in to address their underweight positions in real estate, analysts Richard Jones, Ben Brayshaw and Krzysztof Kaczmarek wrote in a recent note.

“We expect 2020 again to be active with transactions markets healthy, balance sheets in good shape and conducive equity markets likely to continue supporting the deals.”

In their busiest year since 2005, the listed property players bought $10.2 billion in local assets in 2019, well ahead of the $4 billion total in 2018 and $3.5 billion in 2017.

All assets classes – office, industrial, residential, storage – are in the cross-hairs for listed buyers, except for retail property where assets are trading below book value and cap rates are softening.

The diverging performance of retail assets was a defining theme across 2019 as major mall stakes including Adelaide’s Westfield Marion and Perth’s Garden City were divested.

Historically, the major asset classes within property “have essentially moved in tandem”, according to JPMorgan, but that pattern was disrupted last year as industrial real estate outperformed and retail significantly underperformed.

Office property delivered a 13 per cent total return in last year as cap rates – an industry metric akin to an investment yield – compressed and effective rent growth rose 4 per cent.

Retail property delivered a flat total return, with rents falling 1 per cent and cap ratesexpanding. In contrast, industrial property delivered a 17 per cent total return in 2019.

“The interest rate environment has, in our view, in part delayed more material retail cap rate expansion,” the JPMorgan analysts wrote.

“We believe a 50 basis point outshift in retail cap rates will play out in 2020 given the slowing rent growth environment and excess assets on the market.”

JPMorgan expects property stocks to deliver a 4.5 per dividend yield, 70 basis points tighter than was expected this time last year,

SG Hiscock & Co portfolio manager Grant Berry expects real estate returns in 2020 to be very unlikely to match those achieved last year. Investors should recognise there are increasing risks emerging, “particularly at such a late stage in the investment cycle”, he said.

“We’ll be continuing to take a fairly conservative approach to valuations pushing up capitalisation rates.

“Our preference will be to have exposure to high quality assets, AREITs with less cyclical factors, and investments trading at discounts that are out of favour.