Winners and losers of Australian real estate investment trusts

Investors who have put their faith in Australian real estate investment trusts (A-REITs) have done well over the past few years.

Performance of the sector was up 24.86% in the year to November as measured by the S&P/ASX 300 A-REIT index.

Longer-term returns are also sound, 13.58% a year over three years and 13.17% a year over five.

But behind the headline performance there are winners and losers among the funds. For example, based solely on price performance the Charter Hall Group (CHC) is up 47% for the year to date (December 16), whereas the Scentre Group (SCG) is down 5.3%.

For investors looking for A-REITs that will outperform in the future, a comprehensive Australian property sector report from investment bank Morgan Stanley raises some interesting themes that it says will dictate future performance in the sector.

"We prefer manufacturers over collectors, creators over owners, and we are selective with value," says the Open for Inspection - Identifying the Best Investments report, by equity analysts Simon Chan and Lauren Berry.

Based on these themes, the report lists its top 14 A-REITs for the future including price targets. The top five are listed in the table.

The Stockland Group (SGP) is the number one pick for growth. It's one of the largest diversified property groups in Australia - owning, developing and managing a large portfolio of retail town centres, workplace and logistics assets, residential communities and retirement living villages.

Stockland has performed broadly in line with the industry over the past 18 months, despite being hampered by residential sector headwinds, and is now due for an upward re-rating, according to the report.

"We see SGP as the most interesting stock in our universe given the heavy negative sentiment against its retail assets (40% of earnings) and the weak (but bottomed) residential segment (35% of earnings). With the stock effectively at trough earnings in FY 20, we believe the time to be more bullish towards SGP is now, with a 12-18-month forward-looking view," the report says.

The Goodman Group (GMG) is the second pick. It's also ranked No. 1 in the BDO Australia Top 10 A-REITs for 2019, achieving a total shareholder return of 59% over one year and 123% over three years. The Goodman Group specialises in buying and developing warehouses and distribution facilities globally for online retailers, benefitting from the e-commerce boom, with key clients including Walmart and Amazon.

Morgan Stanley rates the company as one of the creators of real estate - a group that also includes other top-five placegetters Lendlease (LLC) and Mirvac (MGR) - where the core business is about exploiting the spread between construction costs and values.

Describing it as the "epitome of the new-age real estate company", the report says the Goodman Group focuses on sourcing land, building assets through development (38% of income), collecting rent (30% of income) and earning management fees.

Another market darling, Charter Hall is No. 3 on the Morgan Stanley list and ranked No. 2 in the BDO Top 10, returning shareholders 71% over one year and 133% over three. It's categorised as an earnings manufacturer by Morgan Stanley, a trend that has evolved over the past five years to a pipeline that now spans $6.5 billion, of which 60% is in office.

"As a property fund manager, the company has proven its ability to raise funds and source assets to boost funds under management over the past five years from $12 billion to $35 billion," says the report.

Lendlease, a multinational construction, property and infrastructure company, is fourth on the Morgan Stanley list. And along with Stockland, it does not rank in the BDO Top 10. Morgan Stanley sees the company as both a creator of real estate and an earnings manufacturer.

"Lendlease's decision to exit the engineering and services business and focus on its core strengths of urban development, regeneration and property construction/creation is appealing and, when properly executed, could lead to
a multiples re-rate," says the report.

Mirvac rounds out the Morgan Stanley top five and ranks No. 8 in BDO's Top 10. It's also classified as both a creator of real estate and an earnings manufacturer. The report says: "We like the company's strategy of earning profits from every facet of its expertise, from asset creation (development profits), operations (management fee and rent) and residential development - especially at a time when asset values are expensive."

Get stories like this in our newsletters.