EUR 850.00 For Business Accounts Only

Morningstar | Transfer of Coverage for Growthpoint; No Change to Our View

We reiterate our AUD 3.30 fair value estimate for no-moat-rated Growthpoint Properties following a transfer of coverage to a new analyst. At current levels, shares screen as overvalued. While the firm offers a reasonable yield, the trust is higher risk than many Australian REIT peers because of its high financial leverage and lower-quality portfolio.

Growthpoint’s property portfolio is split roughly two thirds office and one third industrial. The portfolio is relatively new, but the office assets are generally in secondary locations.

The core of Growthpoint's industrial portfolio are four warehouses leased to Woolworths, representing about half of the industrial portfolio. A high proportion of leases containing fixed annual escalations underpins modest revenue growth over the medium term. The key industrial assets have desirable qualities, such as close proximity to infrastructure like airports and major highways. The main negative for the industrial landlords as a whole is that entry barriers and tenant loyalty are generally low. Generally, we view industrial property as non-moatworthy, as an abundance of cheap land and high competition in the subsector makes it unlikely a landlord will be able to achieve sustainable returns above the cost of capital.

While current conditions in Australian office markets are strong, we have a cautious longer-term view based on a likely softening domestic economy, negligible white-collar employment growth, and headcount reductions in the public and private sector fuelled by renewed focus on corporate cost efficiency.

We believe office assets in secondary locations, such as those owned by Growthpoint, will be most affected in any downturn, supporting our view that rents on lease renewals could fall in the medium term.

Typically, these properties are at a structural disadvantage to high-quality properties in central business district locations, which enjoy consistent demand and some barriers to entry deterring new supply. Redeeming factors include a solid weighted average lease expiry (more than six years) and contracted rental increases that are either fixed or linked to the consumer price index. We do not ascribe a moat to Growthpoint's office assets, primarily because they are in secondary locations where entry barriers are generally low.