FEW investors greeted the end of the financial year with more relief than those who had stowed some of their hard-earned cash in the real estate sector.
The research team at Citigroup said it was easy to see the stresses in the sector by viewing it on a quarter-by-quarter basis. There was a 57.3 per cent fall over quarters two and three and the sector hit an all-time low on March 9.
The brokers said market participants would be juggling a number of countervailing issues, namely: did the bounce in the fourth quarter occur irrespective of the capital raisings and to what degree can the market discount this bounce as a guide for the direction of the A-REITs in this financial year?
The analysts said that with additional shares on issue there were questions over whether the sector poses any material earnings growth and, if not, would a significant shift in distribution yield and its sustainability loom as the key valuation driver?
Jones Lang LaSalle's NSW managing director, Michael Fenton, said that after the successful recent capital raising by the listed sector, the next wave of sales activity was expected to be in the unlisted sector and focused on secondary assets.
He said despite the cash injections by the large A-REITs, including Westfield, Stockland and GPT, which successfully raised equity capital of about $7.8 billion, it remained to be seen how the unlisted sector would perform. "We are expecting sales volumes to increase in the second half of this year partly as a result of more distressed selling, particularly in secondary markets," he said. "In comparison with prime property assets, second grade assets have further to fall and will take longer to recover.
"This will create opportunities for active managers and developers who wish to acquire assets on attractive valuations and reposition or develop them to take advantage of the upturn in property markets into 2011 and beyond.
"Privates who are savvy will make the most of these buying opportunities in a market where funds in the unlisted sector are reviewing investment strategies and positioning themselves in an environment where we expect they will be under financial pressure."
Jones Lang LaSalle Research anticipates that many secondary grade office assets will record sharp falls during this year and next. This reflects rising vacancy rates in all office markets and the unsustainably sharp yield compression recorded by secondary grade assets between 2005 and 2007.
Mr Fenton said the window of opportunity for prime property assets would start to close within six to 12 months and the focus would then turn to secondary assets. "With the listed sector focused on getting secondary assets off their books and the unlisted sector expected to be into forced selling, it is opportune for those buyers who want to acquire attractively priced secondary assets and refurbish and reposition them for when economic conditions are expected to improve, the property market recovers and vacancy rates tighten."
