All Ords Set for a Nasty Snap Back
October 26, 2009 8:34 pm by Dean Morel
Here is a chart of the Australian All Ordinaries Index viewed as the index’s percentage divergence from the 50 and 200 day moving averages. Click the chart to enlarge it.
As the chart highlights the elastic band is very stretched. Since 1984 the price has only been this far above the 200 DMA on two occasions, 1986 and 1987. While I doubt we’re in for a Black Monday style correction that is not good company to keep. The price can stay stretched at these levels for some time, but invariably the resolution is to the downside as the price snaps back to the long term moving average.
Now is not the time to be adding exposure to the Australian market. The 200 DMA currently sits at 3938, but is climbing quickly.
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Hi Dean, what is your take on A-Reits, I picked up some SLF, the index tracker, at 7.9, the yield (7.5% unfranked) is not as good as telstra, but I have plenty of TLS now. I also suspect the A-Reits may have more potential to increase their divs in the next year than TLS.
A-Reits have more potential for a larger move than Telstra, I’m just not sure which direction that move will be. US commercial RE is still in danger. Australian RE could fall. RE is not in my wheel house so I’d only buy if it was a screaming bargain. Though when it was a bargain in March everything else was as well, so I didn’t buy. A-Reits have certainly worked out better than Telstra since then.
S – You probably know more about the A-Reits than me as RE is only vaguely on my radar. Good luck with your investment.
The Daily Reckoning had the following to say the other day.
“The logic of the trade is that the A-REITS have taken their losses (mostly on foreign commercial real estate assets) and recapitalised through debt and equity markets that are no longer so tight. But if you’re long the A-REITS, you’re also assuming there won’t be any further losses on a portfolio of Australian real estate assets, and that there won’t be any more funding problems for the sector.
Those are two pretty big assumptions. And you know what they say about assumptions. Besides, if you wanted to speculate in the A-REITS, the time to buy them was 73% ago in March, when the S&P 200 A-REIT index was trading at 546. Now it’s trading at 950. Over in the research and analysis wing of our new mansion/headquarters, Kris Sayce and Shae Smith are preparing a short report on “5 time bomb property investments to dump now.” We’ll keep you posted on the results.”
http://www.dailyreckoning.com.au/dont-buy-the-a-reits/2009/10/20/
Hi dean, I saw the article by Dan Denning before. I don’t agree entirely. The A-Reit 200 index is about 850 currently and maybe back at 800 soon. The index bottomed at 550, but who can pick the absolute bottom ? I think if you picked up some at 700 or 750 then you are doing well. As it was descending so rapidly, it was only around 700 that I thought a clear bottom had formed. I guess the same can be said with the ASX, no one could have known 3200 was the bottom until 3800 or so.
My interest in the A-Reits is because I’ve wanted to pick up a commercial retail space but there have not been the firesales anticipated. I thought I would get some exposure to partially hedge my likely need to buy something to use in the next 3 years. Previously, I had some SLF until late 2006, when it went for a big runup and I thought it was overpriced and fortuitously got out. I haven’t looked at it again since until recently. I think getting in anytime until recently was not sensible on the way down.
Unfortunately there are some with nasty structures (thanks Maquarie !) but that is only a small proportion of the index which is gradually getting sorted out. 50% of the index is Westfield, which should do ok, except for their USD exposure (which they say is well hedged, but who knows). If you look at the long term chart for it, the index peaked at over 2500 in 2007, which is a hefty fall to 550. As a group the REITS raised a lot of capital in the last 2 years and the index gearing ratio was reduced from over 40% last year to around 30% currently. I think the write down’s are already mostly done. The funding issues are also likely not to be a major issue in Australia going forward.
I think the index is trading at below NTA for the underlying properties, which should do well with the pace of recovery in economic and retail activity. On a long term basis, the yield is hedged against inflation, as rental agreements usually involve a CPI item. The current yield at 7.5-8% is attractive. Most of the buyers this year I think have been international yield seeking play on global risk appetite long AUD/short USD. The local interest in REITS has been low. Too many people have been badly burnt on the way down (80% from peak to bottom). The distributions were cut last year and this year quite a bit. At some stage they should recover. Even if they don’t, the yield is still 8%.
Thanks for your great site, I found it yesterday and it is very insightful.
Thanks for your insights S. I’ll look into A-Reits. I too was looking at commercial retail space, merely out of interest. I was pondering whether I was game enough to borrow USD on long term low rates and invest it back here in commercial real estate. I saw a few deals for $20M plus (way out of my league, but hey super cheap money was available) with yields of 10-11%. A 6% spread on $20M is $1.2M p.a., plus the probability of a good FX bonus with low probability of currency going against me. I’m not yet knowledgeable or confident enough for that type of play. Can anyone recommend any good books/sites on commercial RE.
Index
- trading below NTA
- yield 7.5-8%
- gearing 30% down form 40%
- most buyers this year international. Currency risk, those same buyers will be sellers if USD strengthens.
- check size of write-downs.
Hi Dean, unfortuantely I have no knowledge of commercial valuation, which would be very useful to invest in individual REITS (eg CFS, based on their main properties) to get at underlying value. I should probably do some research and read some books on commercial real estate. Instead I have attempted to determine basic intrinsic value for the index.
At 850, estimates of discount to NTA by the brokers range from 1% to 15%. At current prices WDC (Westfield), the main constituent (50%) of the index is trading at 12.27, book value 12.6, NTA 11. P:B for WDC is 0.97, for the rest of the sector it’s 0.6-0.7. When the index was at 950, there was less of margin for haircut than say 800.
Looking at the REIT business model, the main income is from rental and the main cost is interest. For WDC this was 50% of expenses. It ballooned out last year, for WDC, their net interest expense last year was 334m compared to 233m the year before. The other trusts probably had a bigger hit. The GFC made them short term insolvent with completely unavailable credit or through the roof credit spreads. I think this should continue to normalise and their interest expense may go down in the next 2 years despite increases in the cash rate. They should be able to start to tap the bond market again, particularly in Australia.
Unfortuantely, the refinancing in the last year was at userous rates but going forward, the refinancing cost should go down.
The main risk to distributions in the next year is that WDC will reduce theirs to 80% earnings from next year, currently it is 100%. I think this is largely anticipated.
I am looking at trying to get a holding in SLF at an average cost basis of 7.6. I think the upside is capital appreciation from the index going back to NTA of the underlying assets, increased distributions due to reduced cost of funding, further write downs being smaller than anticipated and actual capital appreciation in the underlying properties in the long term. Due to the carnage in the last 2 years there is actually little in the pipeline for retail or office space in Australia in the next 2 years and rather than further write downs of 15%, there may actually be a small appreciation in NTA if economic activity remains buoyant.
SLF peaked at $24 in 2007, there has been $10 per share in writedowns since then and the current price is $8 (which means another $6 was vapourised somewhere).
Here’s some more bullish opinions to balance out Dan’s more pesssimistic outlook.
http://strategicfp.com.au/uploads/file/OI16-11-06-2009.pdf
https://www.credit-suisse.com/au/asset_management/doc/0910CSAustralianLPTFund.pdf
http://www.moneymanagement.com.au/article/Listed-property-Out-of-the-abyss/499962.aspx
http://www.theage.com.au/business/reits-on-the-retreat-after-20b-losses-20090901-f5r8.html
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