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Can Aussie REITs ride on strong economy?

SYDNEY: Australian property trusts face a positive outlook as property prices stabilise and gearing falls after companies delivered mostly strong earnings in the latest financial year.

An economy which grew at its fastest pace in three years in the last quarter could boost local REITs.

But skeptics aren't convinced, pointing to unattractive valuations, risks from global economic uncertainty and the weak office rental market.

Time to buy

Simon Marais, managing director of Orbis Investment Management, forecast 2010 would be "when things bottom and you can see that in the results that come out."

Property firms, such as Lend Lease and Westfield Group, have reported a return to annual profit, after being scarred by impairments and writedowns. Marais said stabilising vacancy rates and returns on property investment are pointing to a shift in the cycle, offering good opportunities.

"From now on, suddenly you might find the valuation starts to go up rather than down and that has an incredibly positive influence," he said. "If you ask me what's the big story going forward, that's it."

Marais, who favours Valad Property Group and EDT Retail, said steady rental income should be attractive when interest rates are low globally. John Kim, head of Australia real estate research for CLSA, said retail property stocks were a good pick given Australia's improving employment and consumer confidence. CLSA has an outperform call on Westfield and CFS Retail. Kim said Australian residential stocks looked attractive, compared with those in Singapore or Hong Kong.

"We are concerned about Hong Kong and Singapore residential developers because the governments are aggressively introducing measures to cool the property markets," said Kim.

According to UBS, forecast earnings yields for 2011 for Australian REITs stands at 7.6%, compared with 5.3% for Singapore REITs and 4.4% for Hong Kong REITs.

Buyers beware

Richard Morris, portfolio manager at Constellation Capital Management, said property stocks were expensive compared with other sectors.

"We don't think it's attractive at the moment on valuation," said Morris. "They are on a big rally of PEs and they've got lower earnings growth than the rest of the market."

Australian REITs are trading at price to earnings ratio of 12.7, compared with 10.4 for the metal and mining sector and 10.6 for the banking sector, according to ThomsonOne data.

Andrew Parsons, senior portfolio manager at Resolution Capital, said weak corporate sentiment was a worrying factor.

"Investors will reflect on the fact that underlying rental growth is still somewhat patchy as a consequence of elevated vacancy levels, principally in office markets," he said.

The growing number of offshore investors in Australian REITs has made the trusts more vulnerable to events in global markets and resulting capital flows, said Darren Steinberg, head of property for Colonial First State Global Asset Management.

"The nature of investors has changed," Steinberg said. "If they (offshore investors) see better opportunities elsewhere, they will shift their capital to maximise their returns." -- Reuters
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