The search for yield is proving a boon for several lucky sectors of the economy, but two that really stand out are real estate investment trusts and fixed income fund managers.
As the Reserve Bank of Australia ratchets down the official cash rate towards zero, investors are showing a willingness to pay a premium for predictable and relatively secure cash flows.
Investors are also willing to pay handsome management fees to fixed interest fund managers who are delivering better returns than those available in a bank through investments in a range of debt and income securities.
The REIT sector is now trading at a 20 per cent premium to its 10-year average price earnings ratio and a 9 per cent premium to its 10-year average book value, according to Richard Coppleson at Bell Potter.
The demand for yield has seen investors willing to pay about 16 per cent less than the average REIT yield over the past 10 years. The yield now is between 4 per cent and 5 per cent.
That looks very attractive compared with term deposit rates and basic bank deposits. GPT’s yield is 4.26 per cent. Its securities are up 19 per cent on a year ago.
The hunt for yield has given the REITs considerable sharemarket currency to fund expansion.
The sector is in a sweet spot with 21 capital raisings this year totalling $4.87 billion, according to Coppleson.
On Monday, Bob Johnston, chief executive at GPT Group, reaffirmed GPT’s full-year distribution guidance issued in June.
Johnston is a respected property manager who has given GPT renewed momentum since joining from Australand in September 2015.
GPT, which has a mix of commercial property, retail centres and logistics assets, has reaffirmed it will deliver distribution growth for the full year to December of 4 per cent.
Investors like this sort of forward guidance, which is similar to the big infrastructure asset owners such as Sydney Airport and Transurban.
Johnston joined the capital-raising frenzy with an $800 million placement in June to fund the purchase of 25 per cent of the Darling Park/Cockle Bay office, retail and dining complex and fund the next stage of growth.
GPT is experiencing some of the best conditions in the commercial office space for years with a 97 per cent occupancy rate, including the Darling Park office towers. Vacancy rates at GPT are below long-term averages, while office rental growth was 3.4 per cent in Sydney and 2.7 per cent in Melbourne in the half.
GPT’s office valuations rose by $114.8 million in the half year to June 30, and about 70 per cent of this valuation uplift was attributable to market rental growth. However, growth in valuations slowed from last year, which explained the 51.6 per cent decline in net profit after tax.
The trust’s retail assets are facing headwinds, but Johnston says assets in the right locations are continuing to attract demand from domestic and international tenants.
“We expect that the retail environment in the second half of the year will benefit from lower interest rates, income tax relief and the stabilisation of house prices,” he said.
Income growth in the retail portfolio was 1.4 per cent mainly because of the negative impact of the Casuarina Square shopping centre in Darwin.
In the fixed interest sector, investors have done very well over the past year from funds investing in debt and income securities, with returns ranging from 3 per cent to 7.6 per cent. Management fees for the leading fund managers in the sector range from 0.25 per cent to 0.95 per cent.
One fund manager has the ability to charge up to 5 per cent for its fund (with 30 days notice) and another manager charges a 22.5 per cent performance fee for returns achieved over cash, plus 2.19 per cent per annum.
There has been a surge of inflows into the hands of fixed income managers from both institutional mandates and retail investors desperate for yield.
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