EUR 850.00 For Business Accounts Only

Morningstar | Change of Coverage of GPT; No Change to Our View. See Updated Analyst Note from 21 May 2019

We reiterate our AUD 5.40 fair value estimate for narrow-moat GPT Group following transfer of coverage to a new analyst. At current levels, shares screen as slightly overvalued. While the firm owns a high-quality property portfolio, we’d wait for a correction before recommending buying. Key risks include likely rising interest rates over the longer term, ongoing loss of sales to online channels and economically sensitive office properties.

The retail portfolio consists of interests in 15 shopping centres. We expect rental growth to moderate because of pressures stemming from sales leakage to online retailers, consumer deleveraging, and declining sales productivity. GPT benefits from fixed rental increases under current leases, but future leases are likely to be negotiated at lower base rates, reflecting soft retail sales growth since 2009. Solid retail rent growth in the face of slowing retail sales is unsustainable.

GPT’s office assets are some of Australia's best, with all-rated prime (60% premium-grade and 40% A-grade) and located in the central business districts, or CBDs, of Australia's three largest cities (approximately 58% in Sydney, 31% in Melbourne, and 11% in Brisbane). Earnings certainty is reasonably high, with a weighted average lease expiry of approximately five years. Lease structures support rent growth, with more than 80% of gross lettable area subject to fixed annual increases of approximately 4%. Office markets, particularly Sydney, have been strong, supporting good rental increases on new and renewed leases. But conditions won’t remain good forever, with key threats being new building supply and a potential economic decline.

The funds management operations, although relatively small at 10% of EBIT, presents attractive growth and return on equity prospects. This division comprises two wholesale funds: the AUD 8 billion office fund, GWOF, and the AUD 5 billion shopping centre fund, GWSCF. GPT owns about 25% of both funds.

GPT owns about 25% of both funds. We consider earnings risk for management fees associated with these funds to be very low because of the limited ability of investors to redeem interests. In fact, strong institutional demand for high-yielding, good-quality Australian property makes it highly likely GPT secures further inflow to its funds management platform.