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Pub float may add life to listless REITs

The next 12 months are tipped to be better for the industrial and residential-focused real estate investment trusts, as investors prepare for several new floats, particularly in the volatile pubs sector.

Expectations of an improvement in the office leasing market have also seen a turnaround in preference for office REITs, albeit at a slow pace.

Following the listing of Hotel Property Investments in mid-December, the Riversdale Group, backed by John Singleton, Geoff Dixon and Mark Carnegie, will now look to raise capital from a float on the Australian Securities Exchange early in the new year.

Shares in HPI, which oversees a portfolio of 41 pubs and seven detached bottle shops, floated at $2.10 each and have traded recently around $1.95.

The $250 million raising also included a high debt component. Analysts warned that the performance of recent floats with hefty debt components was not as attractive.

The new year will also see the conclusion of the takeover of the Commonwealth Property Office Fund and the demerger of Westfield into the new Scentre Group (formerly Westfield Retail Trust) and Westfield Corp.


The float of Riversdale is tipped to occur in the first quarter amid expectations of continued low interest rates, which makes floats with higher yields attractive.

Riversdale will be run by its co-founders, Paddy Coughlan and Rod Kelly, with its portfolio of pubs including the Bristol Arms in Sydney, Kinselas, The Vic at Enmore, The Marlborough, The Como and The Elephant Arms in Brisbane.

Riversdale, which will be renamed the Australian Pub Fund after the float, was set up by MH Carnegie & Co, which will manage the investments. Mr Carnegie said recently that investor appetite for pub assets was strong.

''It is an immensely compelling business … a cash cow that can generate money in an extremely low interest rate environment,'' he said. ''It is an inflation-protected business.''

He declined to give a time frame on the float, but said after a long time in the doldrums for the pub sector, ''there was less blood on the streets''.

According to Goldman Sachs property analysts, while they are underweight REITs due largely to the view that the interest rate cycle is reaching a base, they see potential for further net tangible asset (NTA) growth, particularly for office and industrial properties.

''We believe further growth in NTAs of REITs would be matched by stock price growth as REITs have a long-term strong correlation between pricing and reported NTA,'' Goldman Sachs said.

''The 'longer-for-lower' interest rate environment, which is now our house view, should also be supportive of continued demand for yield investments.''

Maurice O'Connell, vice-president and senior analyst at ratings agency Moody's, said steady fundamentals continued to support a stable outlook for REITs.

''Our report notes that while the A-REITs' low financial leverage and low cost of debt should provide impetus for releveraging, we expect such releveraging to be at moderate levels in 2014. Consequently, any increase in

debt levels should be mostly within Moody's rating parameters,'' he said.

''However, the REITs face headwinds over the next 12-18 months, including soft business confidence, rental pressure on lease renewals across the office, retail and industrial segments and a challenging retail environment.''

Tony Sherlock, the senior property analyst at Morningstar, said the REIT sector continued to underperform the broader market in the December quarter.

''Our preference is for property stocks with very reliable income streams, along with a solid growth outlook,'' he said.

''In this regard, we see a number of good-quality REITs as looking relatively attractive. Our top picks are Westfield Group, BWP Trust and Goodman Group.''