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The Australian REIT sector has been buffeted by the headwinds of rising interest rates at both the long end (10year Commonwealth Government bond yields) and the short end (RBA official cash rate) and it offers an attractive 6.0% dividend yield (excluding the fund managers) and 4.5% on the overall index (S&P/ASX300 Property). Furthermore, dividend growth of 3.5%pa is expected over the next four years. On an asset basis, the rental REITs are pricing at a 19% discount, the market is pricing in a significant rise in cap rates (fall in valuations); the majors 150bps, diversified REITs 100bps and the retail REITs a 200bps rise. History shows in the chart below these value opportunities are infrequent, the GFC, COVID, and now.
Premium/discount to NTA
For investors, Australian REITs provide some of the highest quality real estate in Australia with the added benefit of a deeply liquid market. While direct property valuations are lagging the listed market, we see the listed market has over-priced the downside with expected falls in property values. For Charter Hall Maxim investors we offer a high-quality REIT portfolio spanning not just the core sectors of office, retail and industrial but also the emerging property asset classes currently undergoing institutionalisation, such as, manufactured housing, seniors living and affordable rental accommodation, and agriculture to name just a few.
The Charter Hall Maxim Property Securities Fund (Maxim) takes a medium to long term view on the REITs’ underlying property asset classes possessing the tailwinds of major structural changes, for example, an ageing population, lack of affordable dwellings and urbanisation.
Within the AREIT sector many REITs with asset management businesses are priced on no or low asset management earnings multiples with the norm being below the sector average of 15.2x. These AREITs are highly capital efficient, have long duration funds, often with low liquidity and as result their assets under management are very sticky. It can be argued, this sub-sector has been the most impacted from higher bond yields and the uncertainty about future earnings growth.
Other property sub-sectors in the AREIT market that stand-out are industrial with the strongest rental growth and low national vacancy of only 0.8% with limited short-term supply, convenience retail which is expected to be the most resilient retail format going into an economic slowdown in 2023 and many small cap REITs covering several nascent property sectors, such as manufactured housing, affordable accommodation, seniors living, childcare and others.
AREIT sector balance sheet health is robust with sector gearing at 26%, interest cover at 8.8x versus debt covenant at 1.9x, good debt tenor at 5.2years with 71% of debt hedged. Most importantly the outlook for sustainability of dividend yields is favourable with sector dividend payout ratio of only 63%. Overall, the AREIT sector is well-capitalised with most REITs offering dividend yields in the 5% to 7% range. AREITs compelling total return proposition is underpinned by predominantly strong tenant covenant rental income streams that enable growing dividend yields and should appeal to many investor types.
For more information on Maxim, go to www.charterhall.com.au/maxim
Disclaimer: Investors should consider the product disclosure statement (“PDS”) issued by, One Managed Investment Funds Limited (ABN 47 117 400 987) (AFSL 297042) (“OMIFL”) as responsible entity of the Charter Hall Maxim Property Securities Fund ARSN 116 193 563 (“Maxim”). The information contained in this report was not prepared by OMIFL but was prepared by other parties. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information contained therein cannot be warranted or guaranteed. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should carefully consider each of the Product Disclosure Statement dated 29 September 2022 (together with the Additional Information Booklet dated 29 September 2022) (“PDS”) and Target Market Determination (“TMD”) issued by OMIFL before making any decision about whether to acquire, or continue to hold, an interest in Maxim. Applications for units in Maxim can only be made pursuant to the application form relevant to Maxim. A copy of the PDS dated 29 September 2022, TMD dated 20 October 2022, continuous disclosure notices and relevant application form may be obtained from www.oneinvestment.com.au/charterhallmaxim/ or www.charterhall.com.au/maxim. You should also consult a licensed financial adviser before making an investment decision in relation to Maxim. A copy of the PDS may be obtained fromwww.oneinvestment.com.au or www.charterhall.com.au. Charter Hall Property Securities Management Limited (ABN 25 104 512 978) (AFSL 238349) (“Charter Hall Maxim”) is the investment manager of Maxim. Neither OMIFL nor Charter Hall Maxim guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this report. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this report, Charter Hall Maxim makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This report has been prepared for the purpose of providing general information only, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this report, and seek professional advice, having regard to their objectives, financial situation and needs. Information in this report is current as at 24 November 2022.