Stocks in Australia’s battered $165 billion listed property sector are faring better than many of their global peers, and are likely to attract takeover interest from cashed-up private players towards the end of 2023 and into 2024, according to Citi.
Local real estate investment trusts (REITs) are trading on average at 14.9 time earnings, compared to those in the US at 15.7 times, in the UK at 18.4 times and at 23.4 times in Japan. Only property stocks in Hong Kong and Europe are cheaper than those in Australia.
“Australia can be considered as inexpensive”: Ben Connolly, Citi’s managing director head of real estate for Australia and NZ. Michael Quelch
At the same time, Australian REITs’ dividends yield, at 5.7 per cent, is the second highest globally, behind Europe. Like other property stocks around the world, investor wariness over real estate’s exposure to interest rate rises sent property stocks plummeting in the past year well below their net asset values. Australian stocks are trading at a 17.9 per cent discount to their NAV, better than those in the UK, Hong Kong and Europe.
Put together those metrics mean Australia’s REITs now represent value for money, especially for private capital, including from abroad, according to Ben Connolly, who heads Citi’s real estate team in Australia and New Zealand.
“From a global equity investor perspective, Australia can be considered as inexpensive from a valuation perspective and also with lower downside risk, relative to other geographies, given the more stable economic environment and outlook,” Mr Connolly told The Australian Financial Review.
That assessment puts Australia’s listed property stocks in the crosshairs for private capital M&A activity – including from pension funds, sovereign wealth vehicle, and private equity operators – which will be on the hunt for acquisition opportunities, once debt markets open up, according to Mr Connolly.
“If A-REITs don’t re-rate back towards NAV and cash flow multiples don’t improve at the same time as acquirer confidence returns, then they will become increasingly vulnerable to activist activity and private capital pursuing a privatisation,” he said.
The scenario may take a few months yet to mature, given the broader economic uncertainty, expected declines in asset pricing and further interest rate rises.
“However, once the uncertainty dissipates, acquirer confidence returns and debt funding markets become accessible, then transaction activity is likely to quickly gather momentum and will be predominantly driven by private capital rather than public to public transactions,” Mr Connolly said.
“Although we expect private capital to play a significant role in privatisations of A-REITs in the medium term, the funds management platforms that have been established within these A-REITs are likely to be attractive to only a select group of potential private equity and capital acquirers. With the majority being solely focused on the balance sheet assets.”
That analysis will be tested next week in Florida at the annual Citi Global Property CEO Conference where its 1000-odd participants – the bulk of them equity investors – will hear from 150 or more global REITs including a handful of Australian players such as Charter Hall, Dexus, Mirvac, Stockland and Scentre.
While the M&A players sharpen their pencils, Australian property names are already winning attention from global equity investors as local REITs step up their funds management capacity. That gives them access to third-party capital, a crucial growth engine in an environment where capital can be hard to raise.
Of the 24 A-REITs in the ASX 200, 15 now have third party capital mandates in place and earn funds and asset management income, while another six are externally managed. The extent of that funds management development is a unique feature of the Australian market, differentiating it itself from US and European REITs, which are more focused on investing through their balance sheets.
“A-REITs are becoming increasingly focused on establishing their funds management platforms and attracting third party capital mandates, as a means to generate incremental income streams, gain access to a more competitive cost of capital source and being less reliant on their own balance sheet,” Mr Connolly said.
Another topic likely to be canvassed at the Florida meeting is the growth opportunity in alternate real estate assets, including build-to-rent which, while well-established in other global markets, is still gaining momentum in Australia.
“If you consider the 30 largest listed REITs globally, 10 of them are residential focused REITs,” Mr Connolly said.
“What that highlights is that there is a strong equity investor understanding of, and demand for, residential exposure in a listed format. That thematic has taken a significant amount of time to translate to the Australian market and there are still only a very select few A-REITs that have meaningful residential exposure. We expect that to continue to increase over time, alongside meaningful investment from global private capital into the sector.”
Local property stocks shine among global REITs: Citi tips M&A activity from private capital - The Australian Financial Review
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