This post formed the basis of an article that appeared in the February 2018 edition of the ASX Investor Update on 13 February 2018. Michael Gable is a regular expert contributor to the ASX. You can access the ASX version of the article HERE.
Stocks covered: (ASX:SCP), (ASX:VCX), (ASX:CQR), (ASX:SCG).
The share prices for Real Estate Investment Trusts (REITs) have generally done very well over the last 5 years. Falling interest rates and increasing property values have translated into inflating stock prices. The last couple of years however has seen volatility come back into the prices for most REITs. Much of this can be attributed to changing views on future interest rate rises. Generally speaking, rising interest rates can be a negative for the sector. For REITs with a retail exposure, their woes have been compounded. The negative sentiment surrounding Amazon’s entry into Australia has added confusion to the prospects of retailers. This has seen the share prices of retail exposed REITs get hammered even further. At the end of 2017 though, we saw some respite from the selling. REITs saw their share prices improve as expectations of interest rate rises were pushed out further and valuations became much more attractive. Despite the prospect of Amazon disrupting the local retailers, it appeared as though the selling was overdone and there was value to be found. One such company on our buy list a few months ago was Westfield Corporation. The record breaking takeover offer at the end of 2017 was justification of my view that there was still a good profit to be made in buying REITs. With the opportunity to purchase Westfield Corporation at a good price now off the table, should we turn our attention to the other stocks in the sector? The main retail REITS in Australia are Scentre Group, Vicinity Centres, Charter Hall Retail, and Shopping Centres Australasia Property Group. Here I will look at the charts and determine whether any of them are presenting a buying opportunity.
Scentre Group is the Australian and New Zealand portfolio of properties that belonged to Westfield Group and which was merged with Westfield Retail Trust in 2014. When I bought Westfield Corporation last year for clients, it was because they owned the overseas assets. In the US and UK, Amazon is already a known threat, so there was one less layer of uncertainty. Scentre Group owns the Australian assets. This is where there has been a lot of uncertainty because Amazon was still an unknown factor. From its peak in 2016, Scentre Group shares started to trend lower, falling from nearly $5.40 to almost $3.80. The last few months of 2017 saw a recovery in the share price as analysts started to see value again in the stock. At time of writing, Scentre Group is still nearly 10 per cent under the average broker target. This perception of value culminated in the downtrend being broken with Scentre Group shares rallying higher. Then in the wake of Westfield Corporation’s takeover offer, Scentre Group shares managed to trade above $4.40. However, since then the shares have eased back. They might be weakening off in the short term but this recent pullback has been on lower volume. This implies that there could still be further upside. For price action in Scentre Group to remain positive, we need the shares to stay above the downtrend line (the diagonal line on the chart). This means that current levels might represent a buying opportunity.
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Vicinity Centres was formally known as Federation Centres. They own and manage over 100 shopping centres across Australia. A share buyback seems to be offering some support for the share price, but the price action for the stock has generally been negative. The sell-downs during the last year have been fairly sharp and the stock is right near a major support level around $2.50. The last few years almost resemble a large “head and shoulders pattern”. This means that if we get a breach of the $2.50 level, then we could see further downside for Vicinity Centres.
Charter Hall Retail offers exposure to neighbourhood shopping centres which are anchored by a supermarket. The trust is managed by Charter Hall Group (ASX:CHC). The market has been concerned by the lack of earnings growth, the high gearing levels, and uncertainty around asset sales. Price action for the last two years reflects these concerns. The sell-offs have been quite impulsive and any rallies have been a struggle on lower volume. There is also a clear formation of “lower highs” and “lower lows” since the 2016 peak. This indicates that Charter Hall Retail is clearly stuck in a downtrend. At this rate, I don’t see much support coming in until the $3.50 level.
Shopping Centres Australasia owns a portfolio of neighbourhood shopping centres in Australia and New Zealand. The trust was spun out of Woolworths Limited in 2012 and as a result, Woolworths is the anchor tenant for most of the sites. Because of this, earnings are seen as more stable for Shopping Centres Australasia compared to other REITs. Also, because more of the retailers are skewed towards food, the fear of online competition has been less. As a result, the share price for Shopping Centres Australasia has fared better than the other retail REITs. The share price tends to drop away when it pays a distribution but it has generally recovered after a few months or so. Since listing, Shopping Centres Australasia has managed to hold its uptrend. Current levels look like a buying opportunity, but it needs to hold above $2.10.
Michael Gable is managing director of Fairmont Equities.
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