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Trust sector looks to busy year ahead

Sydney commercial property is the most sought after by investors. Photo: SuppliedThe n real estate investment trust sector is the first cab off the rank in the upcoming reporting season with expectations the office and industrial managers will be popping the champagne corks, while the retailers will be on the chardonnay.
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The residential sector is resilient but with a slower rate of growth and affordability will remain the topic of discussion.

More takeover activity is predicted, with Mirvac and Investa Office Fund tipped to be the two big targets.

Giving the office landlords a boost were the latest Property Council of Office Market Reports, which showed that while there has been a small rise in vacancy levels, any excess space is likely to be snapped up this year.

Leasing agents agree, saying that telco, internet-related businesses and the new co-sharing enterprises are taking up any spare offices they can find.

And while there has been a lot of new developments, the continued desire to convert older stock in the apartments will help ease the pressure for C and D-grade properties, which are being left behind for the new buildings.

The same applies to the industrial market, where distribution centres are in high demand from the ever-growing e-commerce sector and expectations that will only get stronger.

Retailer are under pressure from overseas entrants, which puts pressure on landlords for rental increases, but investors are still willing to pay high prices for the malls.

CLSA head of real estate Sholto Maconochie says mergers and acquisitions will likely involve Investa Office, where he envisages three scenarios.

“One, it is taken private by Cromwell Property, which already own 9.8 per cent; Cromwell sells its stake to the Investa Commercial Property Fund, which already owns 19 per cent, and it will continue to manage IOF, or Cromwell sells its stake to CIC which then privatises IOF with Mirvac as manager,” he said.

Another is that GPT Group acquires Mirvac and spins off the residential division and Charter Hall Retail REIT merges with Shopping Centres Australasia, but led by Charter Hall.

Winston Sammut​, managing director of Folkestone Maxim Asset Management, has also earmarked IOF and Mirvac as two potential targets.

Mr Sammut’s Folkestone Maxim A-REIT Securities Fund has been reported as the No.1 performing fund over one, two and three years in the Mercer Investment Performance Survey of n Real Estate Securities (REIT) (Active Funds) at December 31, 2016.

He said the fund was focused on the social infrastructure sector such as childcare and medical, and its underweight position in the retail sector was driven by the view that retail is facing enormous headwinds from internet retailing, a competitive retail marketplace with a growing number of international retailers and ongoing margin compression.

Overall, CLSA, says for 2017, despite expectations of bond yields rising, the company has forecast capitalisation rates to compress and valuations to peak.

“We expect regional retail to outperform; large format retail to re-rate; residential to stay resilient but earnings to peak; and strong office fundamentals to finally show up in earnings, but more weighted to the second half of 2017-18 year,” Mr Maconochie said.

“We see a shift from yield to more growth-driven outperformance and expect a 9 per cent total shareholder return, with a preference for active A-REITS over passive.”

Mr Maconochie said he expects prime and secondary office to outperform again this year, but limited to Sydney, Melbourne and potentially Brisbane, due to favourable fundamentals, strong effective rental growth of 5 to 13 per cent, declining vacancy and investor demand.

With prime assets scarce and prime office capitalisation rates at lows of 5.8 per cent, investors are chasing secondary office or developing them to be premium grade, which will see them outperform other assets.

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