Are shopping centre A-REITs a bargain buy?

Photo of Michael Gable, Fairmont Equities By Michael Gable, Fairmont Equities

min read

What the charts say about Scentre, Vicinity, Charter Hall Retail and Shopping Centres Australasia.

The share prices of Australian real estate investment trusts (A-REITs) have generally done well over the past five years. Falling interest rates and increasing property values have translated into inflating stock prices.

However, in the past couple of years volatility has come back into prices for most A-REITs, much of it attributable to changing views on future interest rate rises. Generally speaking, rising interest rates can be a negative for the sector.

For A-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 local retailers. This has seen the unit prices of retail-exposed A-REITs get hammered even further.

At the end of 2017 there was some respite from the selling. A-REIT unit prices improved as expectations of interest rate rises were pushed out further and valuations became much more attractive. Despite the prospect of Amazon disrupting local retailers, it appeared 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 that there was still a good profit to be made in buying A-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 look at the charts and determine whether any of them present an opportunity.
(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this story).

1. Scentre Group
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 a 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 price as analysts started to see value again in the stock.

At the 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 and 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.

Gable SCG Chart

2. Vicinity Centres
Vicinity Centres was formally known as Federation Centres. It owns and manages more than 100 shopping centres across Australia. A share buyback seems to be offering some support for the share price, but price action for the stock has generally been negative.

The selldowns during the past year have been sharp and the stock is right near a major support level around $2.50. The past few years almost resemble a large “head and shoulders pattern”. This means that if we get a breach of the $2.50 level, we could see further downside for Vicinity Centres.
VCX price chart

3. Charter Hall Retail
Charter Hall Retail offers exposure to neighbourhood shopping centres that are anchored by a supermarket. The trust is managed by Charter Hall Group. The market has been concerned by the lack of earnings growth, the high gearing levels and uncertainty around asset sales. Price action for the past 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.
CQR price chart

4. Shopping Centres Australasia Property Group
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 more stable for Shopping Centres Australasia compared to other A-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 A-REITs. The share price tends to drop away when it pays a distribution but 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.

Gable SCP Chart

About the author

Michael Gable is managing director of Fairmont Equities. He helps his clients achieve higher returns from their share portfolios by combining both fundamental and technical analysis. Michael is also a media commentator who regularly contributes to Sky News Business, the Australian Financial Review and online investing sites. Visit www.fairmontequities.com to claim your free weekly newsletter containing stock tips, videos and education.

Follow: @GableMichael

From ASX

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