Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 183

Have A-REIT share prices bottomed out?

Record low bond yields have supported the valuations and profitability of Australian real estate investment trusts (A-REITs) over the past few years. A-REITs outperformed equities in 2014 (26.8% vs 5.3%) and 2015 (14.4% vs 2.8%).

The A-REIT/bonds correlation has been about -0.5% in 2016 (Figure 1), one of the highest on record. As a result, A-REIT prices have been driven down more by bond yield movements than other factors such as the real estate cycle.

Figure 1: 10 Year Bond Yields & A-REIT Total Returns: 12 Months to 31 October 2016

In recent months the yield curve has steepened as markets embrace increased fiscal stimulus from China and Japan and now the US (following Donald Trump’s election victory), and greater expectations of higher global inflation. Australian bond yields have followed, rising from a low of 1.8% in August 2016 to 2.3% at the end of October 2016. Since then, they’ve risen a further 0.40% to 2.7%.

Property trust prices continue to fall

This year, what was looking like another solid period for A-REITs is in danger of evaporating. Since the start of August, the sector has fallen 18.7% and is now down 2.8% YTD, while equity prices are up marginally YTD.

A-REITs aren’t alone. Global listed REITs in the US, UK, Singapore, and Hong Kong are down, while listed infrastructure and utilities equities have also been sold off.

Figure 2 ranks A-REITs in terms of price performance since August 2016. The largest have been hit the hardest – Scentre (SCG down 24.0%), Westfield (WFD down 20.9%), Vicinity (VCX down 20.9%), GPT (GPT down 20.6%) and Stockland (SGP down 20.1%) at time of writing.

In the hunt for yield, these large cap A-REITs have been well supported in recent years by generalist equity funds who have taken advantage of the liquidity they offer to park their money there. It is therefore not surprising that when the herd stampeded towards the exit then switched into more cyclical, growth-oriented stocks, the largest, most liquid A-REITs were hit hard.

Figure 2: A-REIT Price Movements, 1 August to 16 November 2016

With the recent sell-off, the A-REIT dividend yield has risen from 4.2% in July to 5.3%, but there is still a cushion of 260bps relative to the 2.7% 10-yr bond yield, which is above the long-term average of a 196bps spread.

The current yield is based on an average payout ratio of 84%, well below the 100% recorded pre-GFC, not that one wants to see A-REITs go back to those dark old days to boost their distribution yield.

The A-REIT sector is now trading at a price to NTA premium of circa 14%, down from 50% in July. There have been seven periods over the past 25 years when bond yields rose by more than 60 basis points. Figure 3 shows the performance of A-REITs relative to equities in each of these periods.

Figure 3: A-REIT and Equities Performance in Periods of Rising Bond Yields

A-REITs produced positive returns in only one period of rising bond yields (January–November 1994), a period when A-REITs also outperformed equities.

This time round we’ve seen the largest A-REIT sell-off compared with other periods of rising bond yields, despite the fact that bond yields have not risen as much as they did in 1998–2000 and December 2008–July 2009.

The extent of the recent sell-off is not surprising given the level to which bond yields fell and A-REIT prices rose. The dramatic bond sell-off over a short period has affected many yield-sensitive investments, and A-REITs have not been immune.

Will the pendulum swing back?

The question investors need to ask is whether the rapid rise in bonds will continue and A-REIT prices fall further, or has the pendulum swung too far, too quickly?

The A-REIT sector will remain captive to the gyrations of capital markets in the short term. Clearly, if bond yields continue to rise further there could be additional price risk.

However, the recent sell-off in the A-REIT sector has created some attractive buying opportunities. Investors with a longer-term view who can see out the short-term volatility can acquire some of the best real estate in Australia at more attractive prices than they could have three or four months ago.

Overall, A-REITs are in relatively good shape and almost incomparable to those in the lead up to the GFC. Gearing is lower (circa 30%), refinancing risk over the next few years is low (the majority of debt is due to expire in 2021 and beyond), asset quality has significantly improved, payout ratios are respectable and the exposure to offshore real estate is limited (Goodman and Westfield are the two exceptions).

Yet now is not the time to take a passive approach to the sector (i.e. indexing). We expect the variation of performance across the A-REIT universe to widen in the year ahead. Individual characteristics of each A-REIT will be more of a key performance driver than it has been in the past year or so.

Investors need to focus on those A-REITs that have quality management and can generate real value from their portfolios rather than simply relying on lower debt costs to support earnings and firming cap rates (property yields) to drive underlying asset values higher. As Warren Buffet says, “Only when the tide goes out do you discover who’s been swimming naked.”

 

Adrian Harrington is Head of Funds Management at Folkestone Limited (ASX:FLK). Folkestone is a sponsor of Cuffelinks. This article is general information and does not consider the circumstances of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

State of play in listed real estate

The case for active management in A-REITs

A-REITS are looking at M&A activity again

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.