APN Property : 7 big questions for AREIT investors

If interest rates continue to fall, we believe, yes. We expect the 'lower for longer' theme to play out for some years yet. This would be good news as lower rates are likely to equal further price rises.

Why? Because, depending on which valuation tool you use, valuations are not yet stretched. Net Tangible Assets (NTA), a measure which many analysts prefer, indicates valuations are expensive. But we believe this is a distorted figure due to the impact of stocks like Goodman Group (ASX: GMG) and Westfield Corporation (ASX: WFD), which include significant amounts of corporation earnings - those delivered by property development activities rather than rents. These stocks trade at significant premiums to NTA (as much as 70%-100%) and represent around 26% of the AREIT sector, distorting the overall market premium to NTA. There are still a number of AREITs that trade below NTA.

Moreover, AREITs are liquid assets not liable for stamp duty and legal expenses, which can be as much as 6% of an asset's value. A 'neutral' 10-15% premium to NTA isn't unreasonable. Exclude Goodman Group and Westfield Corporation and the sector's premium to NTA is 24%.

Although common, NTA is far from a perfect tool to value stocks. Many AREITs are structured with securities in a trust and a company 'stapled' together. Both parts should be valued separately. The Net Asset Value (NAV) does that. It indicates the sector is trading around fair value. Further, future growth in rents and asset values should deliver further increases in NTA.

And if you believe that interest rates will stay low for an extended period, our valuations imply value in the sector.

All up, the recent surge in AREIT share prices seems to have a foundation and we believe the fundamentals remain attractive.