Brokers push real estate trusts

TURMOIL in overseas economies has turned the spotlight on the Australian real estate investment trust sector with leading brokers now recommending it to clients.

The average institutional fund has about 6 per cent allocated to the Australian REIT. This is tipped to rise as overseas players look for a haven away from Europe.

John Kim, property analyst at CLSA Asia-Pacific Markets, has recommended the sector given its attractive dividend yields, relative earnings resiliency and improved capital management.

In his report Australia Real World (Buy this, not that), he says that with interest rates falling, the yields, of 6.2 per cent are attractive compared to the 10-year bonds of 2.9 per cent. Mr Kim says he prefers the retail sector over the office market, as demand has slowed for offices, and foreign investors are now penalised with a surprising doubling of their withholding taxes to 15 per cent.

''This will affect Sydney offices [55 per cent of 2011 buyers were foreign], as buyers renegotiate to maintain their internal rates of return,'' Mr Kim said. ''While Australia remains attractive due in part to lower interest rates, confidence has been impaired.'' He says that despite the weaker outlook for offices and the generally parlous state of the construction sector, the trusts are still better options than overseas markets.

This was backed up by ratings agency Moody's Investors Service, which maintained a stable outlook for Australia's REIT sector.

The credit ratings agency says its decision is based on the expectation of a steady operating environment in the next 12-18 months.

Its new report says that the underlying drivers for commercial property are expected growth in net operating income arising from fixed contractual rent increases and the generally restrained supply of new properties.

But it added that countering these supportive factors are subdued business confidence, patchy demand for white-collar workers, particularly finance sector-related, and a difficult retail environment.

Melbourne's CBD vacancy rate of 5.3 per cent is low by historical standards. Its relatively small supply is reversing, with about 7 per cent of the market for completion in 2012 and 2013.

Source: http://www.theage.com.au/business/property/brokers-push-real-estate-trusts-20120601-1zmzv.html