A-REITs: a case for cautious optimismApril 25, 2012 / By
The impact of the global financial crisis (GFC) on Australia’s Real Estate Investment Trust (A-REITs) sector has been significant. At the peak of the market in late-2007, the S&P/ASX200 A-REIT Index reached 1,910 points, its highest level on record. As global economic conditions rapidly deteriorated the index fell by a staggering 70%. This compares to the broader S&P/ASX 200 Index which fell by 40% over the same period. At the end of Q1/2012, the S&P/ASX200 A-REIT Index was still 57% below its 2007 peak.
Many reasons account for the poor performance of A-REITS during this period; too much debt, paying out unsustainably high dividend yields, paying expensive management fees and sourcing earnings from more volatile income streams such as development, funds management and less familiar overseas markets. Prior to the GFC many of Australia’s major listed property trusts followed the trend of the broader investment management industry, adopting more aggressive strategies that relied on earnings growth rather than rental income.
A-REITs continue to trade at an average discount of around a 10% to their net tangible assets as investors remain cautious about the outlook for this sector. However, over the past two years most A-REITs have restructured their balance sheets and reviewed their business strategies in response to the impact of the GFC.
We believe that there are three key reasons to remain optimistic about this sector moving forward:
• Gearing – During the mid-1990’s the A-REITs had an average gearing level of around 10%. This figure grew substantially to around 40% by the end of 2007. As asset values collapsed and debt markets froze globally the A-REITs undertook substantial equity capital risings to re-capitalise their portfolios. Average gearing levels are now estimated at around 30%.
• Offshore Versus Domestic – Over the past two years (2010-2011), Australian investors have divested around AUD 14.9 billion worth of offshore assets. This is the largest offshore liquidation by any other country by a significant margin. Prior to the GFC, A-REITs had significantly increased their exposure to international markets as managers shifted investment strategies to focus on opportunities abroad. Many of the major listed property trusts have now either completed or are in the process of selling down their offshore portfolios with a view to focusing on core domestic markets. This will ensure more conservative investment strategies for both managers and investors moving forward.
• Australia’s Economic Outlook – The outlook for the Australian economy remains strong. Deloitte Access Economics (March 2012) forecasts 3.3% growth in the Australian economy in 2012 and 3.4% in 2013. While growth may be uneven across sectors and regions, the fundamentals underpinning Australia’s economic outlook are strong and will help drive commercial property markets over the next few years.
The growth prospects now look promising for commercial real estate and for the listed property sector. With Australia’s economic outlook remaining strong we expect less volatile times ahead for investors in both listed and unlisted investment vehicles.