Property stocks could deliver an 18pc total return: analysts
Goodman Group CEO Greg Goodman. Jefferies analysts are tipping another outstanding year for Goodman, with a 27.6 per cent total return. Photo: Peter Braig

Property stocks could deliver an 18pc total return: analysts

A resurgence in property stocks could deliver investors as much as an 18 per cent total return as government stimulus underpins home sales and retail spending, according to a Jefferies analysis.

Much of the pandemic pain has already been priced into Australia’s real estate investment trusts, in part because the sector has a larger exposure to retail than its global peers. The A-REIT sector underperformed the broader equities market by 6 per cent in 2020.

“Despite a recent rally in bond yields, we expect the macro environment to be supportive and expect A-REITs to deliver 18 per cent total shareholder return in 2021,” analysts Sholto Maconochie and Andrew Dodd wrote in a client note.

That forecast return includes a 4.7 per cent dividend yield, itself a result that is 363 basis points above the risk-free yield of 1.1 per cent on 10-year bonds.

Those low bond rates effectively support real asset prices and the net tangible asset valuations of property stocks.

That boost, in turn, will help offset some of the “weaker fundamentals” in demand for space and rents, according to Jefferies. Australia’s handling of COVID-19 and the prospect of vaccines will also support the recovery in distributions in 2021.

Logistics property powerhouse Goodman was one of the few property stocks to prove resilient during the disruption, riding the wave of demand for industrial space from e-commerce outlets.

It booked a 43.2 per cent total return last year, while fund manager Charter Hall notched up 37.2 per cent, followed by BWP Trust, which owns Bunnings stores and delivered 17.8 per cent.

Jefferies analysts are tipping another outstanding year for Goodman, with a 27.6 per cent total return.

Even the fortunes of shopping centre giants – Scentre which runs Westfield malls and Vicinity Centres – are expected to revive with returns of 17.2 per cent and 13.4 per cent respectively.

“COVID-19 has accelerated the structural derating of malls and increased online sales penetration, but this is largely priced in, with stimulus and grants supporting strong resi[dential] developer pre-sales and house prices and pulling forward demand despite lack of NOM [net operating margin],” they wrote.

“We see industrial outperforming due to secular demand accelerated by COVID-19 with office the wildcard, pricing in around 10-15 per cent effective rental declines but with strong rent collection, valuations holding firm and improving utilisation.”

The rapid shift to working from home and the uncertainty that has created for workplaces over the longer term will result in an “incremental headwind” to office demand, the analysts noted.

But any softening in demand for office space will be partly offset by the likelihood of greater workplace ratios allowed within offices. As well, it is expected flexibility in work practices will increase rather than simply replacing offices with working from home.

As prospects brighten for the year ahead, the battered REIT stocks are now looking more like bargain opportunities for some fund managers.

Earlier this month Grant Berry, director and portfolio manager at fund manager SG Hiscock, said 2021 was shaping up as a “great time to go shopping” for property stocks.

“Our view is they are positioned for recovery. There are stocks that are trading at a discount [to NTA] but ultimately own very high-quality assets providing good cash flow yields – and that’s even before they were collecting all their rental payments and amid an improving outlook,” he told The Australian Financial Review.

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