REITs – The back door into the property sector

Residential property developers are posting solid results this reporting season, as new housing supply is rapidly absorbed in Sydney and Melbourne. Mirvac Group, one of the Australia’s largest residential developers, reported a 36% increase in profits this year, getting a $2 billion boost from record residential pre-sales. Appetite for new residential developments is particularly strong in NSW, where there is still an undersupply in housing. This strong development activity is likely to continue, as rising volumes meet pent up demand. Is demand for residential property sustainable? Double-digit house price growth has reached its peak and rental growth has fallen to its lowest point in 10 years as supply increases. However, yields from residential property remain well above term deposit rates and should support continued residential sales volumes. Investors are likely to need to temper their expectations about future earnings per share growth across the residential sub-sector as valuations peak. Although this asset class is expensive relative to net tangible assets, it remains cheap compared to bonds. More from REIT Portfolio Manager Julia Forrest here (VIEW LINK)