David Levy
Co-Portfolio Manager
Franklin Templeton Real Estate Advisors

Daniel Scher
Research Analyst
Franklin Templeton Real Estate Advisors

Investing in Australia's publicly traded real estate investment trusts (REITs) is an important focus for Franklin Templeton Real Estate Advisors since it is the world's second-largest REIT market behind the U.S. Australia is one of the oldest and most mature REIT markets. More than half of Australia's investment-grade real estate is owned by the Australian REIT sector, a larger ownership percentage than any other REIT market in the world.

Australian REITs have recently gone through a period of adjustment, including re-capitalization, or raising equity to reduce debt; revising earnings-per-share guidance downward to account for the large equity issuance; and lowering dividend payout ratios.

Currently, Australian REITs are benefiting from the country's strong macroeconomic conditions, particularly retail REITs. Retail property has performed strongly in line with a robust retail sector, which received a boost from monetary and fiscal stimulus measures implemented in the past year by the Reserve Bank of Australia and the Australian government. Retail REITs also benefit as an asset class from Australian zoning restrictions limiting the number of new stores and shopping centers that can be built.

The performance of residential property has also exceeded expectations due mainly to an increase in the first-time homeowners grant. The incentive-along with the country's high levels of pent up housing demand and improved levels of affordability thanks to lower interest rates-triggered an acceleration in home purchases.

In our view, Australian REIT Westfield Group is a highly respected Australian REIT due to the quality of its shopping centers in Australia, the UK and the United States, along with its strong business model and track record. Westfield managed with moderate debt leverage prior to the crisis, and it has dominant "fortress" malls for which sales have held up fairly well.

The company has also demonstrated strong capital oversight, as evidenced by measures that management took before and during the global financial crisis. Westfield issued unsecured debt and equity in mid-2008-one of the few REITs that could during the crisis-and has since paid down the outstanding balance on its bank line.

Australian REITs still face several challenges. Many REITs expect meager earnings growth in the short to medium term. At the operational level, earnings growth is constrained due to declining occupancy, particularly for landlords of office buildings. At the financing level, growth is being hampered by increased interest expense, as debt is renewed at higher margins. Nevertheless, the ongoing improvement in financial markets and the resilience of the Australian economy through tough times improve the outlook for earnings somewhat.

The Australian domestic economy has proved to be remarkably resilient through the global economic crisis, incurring just one quarter of negative gross domestic product growth in the fourth quarter of 2008, allowing the country to avoid the technical definition of a recession. The economy decelerated as a result of the global economic crisis, but thanks to factors such as aggressive levels of monetary and fiscal stimulus by Australia's central bank and federal government, respectively, along with growth among Australia's key trading partners, primarily China, domestic conditions are rebounding.

Please click here for more information on the following funds:
FTIF - Franklin Global Real Estate (USD) Fund
FTIF - Franklin Global Real Estate (Euro) Fund