About: Stockland is a diversified Australian property group. Stockland owns, manages and develops shopping centres, logistics centres and business parks, office assets, residential communities, and retirement living villages. The underlying property assets based on book value are approximately split across retail (44%), industrial (13%), office (5%), residential (15%) and retirement living (23%).

Why it is in the portfolio: Stockland provides investors with a wide and diversified exposure to different property types from retail through to residential and retirement living as well as through the development of greenfield sites. Stockland recently announced a slowing in its residential part of the business and the retail component of the business isn’t as high quality as that of Scentre for instance, so is more susceptible to weak retail sales and online retailing. That said, Stockland is broadly diversified and has a strong track-record in development so should benefit in any uptick in housing activity. Given the recent headwinds, Stockland trades on reasonably attractive fundamentals with attractive yield characteristics.

Fundamentals: SGP trades on a price-to-earnings ratio of around 12.5x and a price-to-book ratio of around 1.1x. Stockland provides investors with a dividend yield of around 5.5%. Stockland’s gearing levels are reasonably conservative at around 20% (debt-to-assets) and with an interest-coverage-ratio of around 3.6x.

What could go wrong: Stockland’s underlying properties will be subject to the overall performance of the Australian economy and as a consequence the tenant demand for SGP’s properties. Stockland has a reasonably large exposure to the residential sector when compared to the other REITs in the portfolio, therefore SGP is more vulnerable to the outcomes of the Australian housing market than some of the other REITs. While vacancy rates remain relative low across most real estate sectors this could change if there is an influx of over-supply or if tenant demand falls off. Therefore, investors should be wary of any over-construction in the areas that SGP operates. Real-estate-investment-trusts (REITs) may be susceptible to changes in interest rates for two reasons: firstly, investor demand for yield generating assets means that REITs can trade as ‘bond proxies’ and secondly the cost-of-capital linked to the underlying debt of the business maybe susceptible to changes in interest rates. Therefore, any upward change in interest rates may impact REITs negatively.