THE drop in the official interest rate to 3.25 per cent will be a benefit to investors in the real estate investment trust sector.
According to Bank of America Merrill Lynch analysts it will help in three ways: 1) potential upside for residential developers if these cuts can spur activity in the market for new dwellings; 2) yield-compression pressure at an asset level, driving potential increases in asset pricing; and, 3) potential for further yield compression at a listed REIT level.
This came as Woolworths yesterday revealed its plan to float 70 of its centres to investors.
It will be a $1.5 billion new trust with relatively new assets in Australia and New Zealand and over time development projects will be added.
In a note to clients, Bank of America Merrill Lynch said that in cutting rates, the Reserve Bank signalled a bearish view of global growth.
”In a lower-growth world we believe defensive, inflation-linked yield will remain attractive to investors, with income likely to be a larger component of total return than has historically been the case,” the note said.
”With the REITs still trading at higher than historical average yield spreads to 10-year bonds, we think the sector has the potential to trade higher notwithstanding the strong performance year to date being plus-12 per cent versus the S&P/ASX 200 index.
”We think mortgage rates are likely to be at the lowest level in many years. There is a … correlation between interest rate movements and housing finance activity.”
The head of Australian equities at Goldman Sachs’ asset management team, Dion Hershan, said the 2012 financial reporting season was not as bad as some investors had feared with investors’ expectations having been largely reset.
”Despite an encouraging valuation level for the broader market, the team believes in a targeted approach given the uncertainty that exists locally and globally,” he said.
”The number of companies who missed expectations was broadly in line with the long-term historical average, with the bad news having been broadly factored in.
“On the positive side, interest rates are falling, balance sheets have largely been strengthened, although a few weak outliers persist, and sectors exposed to higher-growth regions have been resilient.”
He said the firm was an early re-entrant back into REITs in 2009 with a view that balance-sheet issues had been addressed. ”The valuation opportunity has largely played out and headwinds are emerging for property fundamentals with regard to rental growth and vacancies.”
This story Administrator ready to work first appeared on Nanjing Night Net.