The qualities of a top-tier property stock

It's what every long-term, sensible investor craves when the chips are down - quality. And in this market, quality is tough to find when all the best public assets have high prices. If you want any evidence of that, look at all the "high-quality" ASX stocks and the P/E ratios these names now bear. Bonds, which used to be characterised as quality defence, are now experiencing their worst year on record. 

It's no different in property - and as Stuart Cartledge of Phoenix Portfolios points out - the traits of a "prime" asset are the same as if you would be evaluating the viability of a stock. Namely:

• Top quality management
  
• A strong portfolio
  
• A decent track record
  
• An attractive price
  

So does any ASX REIT stock fit the bill? In this edition of Expert Insights, Stuart takes me through one name that fits all the above and more. Plus, we take a look at the definition of a "prime asset" and the sectors of real estate that currently have them. 

EDITED TRANSCRIPT

LW: What are the qualities of a top-tier property stock?

Stuart Cartledge: We're buying securities. We're not buying physical buildings. So we look at securities and we try to consider the package of goodies if you like.

I'll give you an example of a stock that I would put in the high-quality camp in terms of the package of goodies that you get. Mirvac (ASX: MGR) is an owner of commercial assets. It's also a developer of both commercial and residential assets. When you're buying Mirvac as a stock, you're buying exposure to a high-quality management team, a portfolio skewed heavily towards office assets. They're also young. By virtue of being young, they tend to be low in terms of maintenance capital expenditure and leasing capital expenditure. You've got exposure to a development business that has got a solid track record, albeit appreciate that in a rising rate environment. We're going to see some weakness in some of that activity. And there is also a developing funds management business.

So we are looking at that stock as a collection of those things. At the end of the day, we're buying a stock. What makes a good security a good investment boils down to price. What are we paying versus what do we think that stock is worth? So buying top quality is great, but not so great if you're paying top dollar for it. So it's a trade-off in these situations.

LW: Do you need to treat each asset and sector separately?

Stuart Cartledge: We're actually trying not to treat each subsector differently. We're trying to, particularly with things like interest rates, that the same assumptions are being made across the board. And I think one thing we can say with certainty is that we're probably going to get these estimates wrong, as the RBA gets these things wrong. 

But the important thing for us is the consistency of application. At the end of the day, we're trying to determine the value of one stock versus another stock.

But we're trying to make assumptions. It does depend on different asset classes. For example, in the case of office assets, you've got to look at the replacement cost versus the current market value. In the current world, in places like Sydney and Melbourne, the reason we are seeing activity in terms of development activity is that we can build an asset for less than what its market value is. So we need to make those sorts of estimates as to what is likely to happen in the supply-demand space in order to determine what a market rent might be or how market rents might grow through time.

An example of a prime asset might be 200 George Street in Sydney, which Mirvac developed a few years ago, and partly occupied. Australia Square in Sydney isn't a prime-grade asset though it probably was at one stage. It's just too old, I think now. It's 50 years old, but an iconic asset in one of the best locations in Sydney. So it still attracts that A grade status. In Melbourne, something like 555 Collins, currently being built by Charter Hall, would be an example of a prime-grade Melbourne asset.

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