November was the third consecutive month of losses for the Australian share market. All sectors saw a loss except for the property sector. With a dividend yield of 4.7%, it’s seen as a defensive sector. More importantly, the outlook for office property remains strong.

I prefer to stay away from retail exposure, given the number of soft updates coming through from retailers this Annual General Meeting (AGM) season. Soft updates from MHJ, TRS, SUL, NCK, FLT. Industrial and office property are seeing positive earnings revision and this is likely to continue. This should help the likes of DXS and GMG.

What do you look for?

When analysing property companies, the type of property (office, industrial, retail or residential), geography of property is important. In addition, the growth from property companies predominately comes from the development component of the business rather than from just the collection of rents.

In regard to rental income, lease agreements tend to be multi year so if rents are going up, the gradual re-setting of leases should reflect higher market rents. So watch rents, vacancy and major tenant risk. Risks comes from the outlook for property, negative gearing and taxation changes.

Property companies tend to have higher levels of gearing and are sensitive to interest rate changes.

My tip: DXS

Dexus owns, develops and manages mainly office and industrial property. The surge in Sydney rents bodes well for increasing rental revenue for the next couple years. The company has the greatest exposure to the Sydney office market amongst listed property companies. Dexus is also diversifying into logistics through an unlisted vehicle; Dexus Australian Logistics Trust. With gearing expected to drop to 20% by FY20, it’s growth profile and lower levels of gearing are an attractive proposition at this point in the economic cycle. The company is guiding to 5% DPS growth in FY19.