Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 358

Not all non-residential real estate performs the same

COVID-19 has had a major impact on all segments of real estate although performance to date has varied by type and sector. We expect this pattern to continue as we move through the recovery phase.

The latest MSCI Mercer Core Wholesale Property Fund Index shows that the 17 unlisted wholesale property funds in Australia worth a collective $101 billion generated a total return of -4.8% in the three months to 30 April 2020 and -0.8% over the year. Yet the 29 listed real estate securities (A-REITs) with a market capitalisation of $95 billion in the S&P/ASX300 A-REIT Index generated a total return of negative -29.7% in the three months to April, and negative -20.1% over the year (Figure 1).

Figure 1: Performance of Listed A-REITs and Unlisted Real Estate: April 2020

Source: UBS and MSCI

The velocity at which the listed A-REIT sector sold off in March and then rebounded in April was quite staggering. The S&P/ASX300 A-REIT Index generated a total return of -35.2% in March, the worst month on record for the A-REIT index, eclipsing October 2008 (-25%).

In April, the A-REITs retraced some of their losses following the unprecedented response from authorities to provide liquidity to credit markets and financial support to households and businesses. A-REITs generated a total return of 13.7% for the month, one of the best monthly performances on record.

Unlike in the GFC, A-REITs were in good shape coming into the COVID-19 pandemic, with significantly stronger balance sheets (lower gearing levels, diversified sources of, and longer duration, debt) and arguably better assets with minimal offshore exposure. Yet that wasn’t enough to offset the rapid sell-off in A-REITs.

Historically, listed real estate securities have tended to quickly overreact to unexpected macro events and overshoot to the downside relative to changes in the values of their real estate assets. The daily pricing of listed A-REITs exacerbates the sell-off.

In addition, a large proportion of the A-REIT investor base now comprises ETFs, index funds and equity funds which will buy or sell based on broader market conditions rather than implied cap rates (yields) or the earnings of the underlying real estate. So, while it was not unexpected that they would follow the sell-off in broader equities market, the magnitude of the sell-off and bounce back did surprise.

In response to dislocation in markets and economy, the managers of the 17 major unlisted wholesale property funds—AMP, Charter Hall, ISPT, Investa, GPT, Lend Lease and QIC—either revalued their assets at the end of March or April, or in the case of some funds, revalued at the end of both months. Figure 1 shows the returns versus the listed market were still markedly different.

Sector performance varies

Drilling down, the relative performance rankings of the sectors—diversified, retail, office and industrial real estate—are similar across the listed and unlisted real estate markets although the dispersion of performance between the two markets is wide. In other words, both markets have similar views on the sectors, it’s just the magnitude in pricing that differs.

Across both the listed and unlisted markets, retail was the worst performer and industrial the best performer over both the three months (Figure 2) and year to April 2020 (Figure 3). Yet in the three months to April 2020, the dispersion in performance between the listed retail A-REITs and unlisted retail funds was 22.6% and between industrial A-REITs and unlisted industrial funds it was 15.0%. Over the year, the dispersion was 17.3% and 11.4% respectively.

Figure 2: Performance of Listed A-REITs and Unlisted Real Estate: Three Months to April 2020

Source: UBS and MSCI

Figure 3: Performance of Listed A-REITs and Unlisted Real Estate: 12 Months to April 2020

Source: UBS and MSCI

Retail faces structural headwinds

Retail, especially discretionary retail, was already facing strong headwinds. COVID-19 is expected to accelerate a cultural and structural shift in the way consumers purchase their goods, many of which had not shopped online before the pandemic. The ongoing challenge to bricks-and-mortar retail formats to remain relevant in a highly competitive marketplace will put further pressure on retailers and their landlords to adapt their offering. Large retail malls, once the staple of a core real estate portfolio, will struggle to outperform.

On the other hand, industrial and logistics real estate continues to benefit from low levels of vacancy and structural tailwinds. Recent events will super charge the growth in ecommerce. Also, the amount of inventory held in reserve ‘so called safety stock’ will increase to avoid companies becoming caught by future disruptions in their supply chains. Retailers, cold storage occupiers and transport and logistics providers will accelerate the optimisation of their supply chains and occupy purpose-built, high-quality technology filled facilities.

Coles’ recent pre-commit on long-term leases to two Charter Hall owned high-tech customer fulfilment centres (CFCs) in Sydney and Melbourne is testament to the changes under way in the industrial and logistics sector. Coles plans to use the UK-based Ocado’s leading edge automated single-pick fulfilment technology and home delivery solution in their CFCs. Commenting on the deal, Coles Group CEO Steven Cain said:

“Ocado’s online fulfilment solution, which also includes new website technology for Coles Online and Ocado’s delivery management technology to maximise transport efficiency, will transform the Coles Online experience for customers.”

Industrial and logistics to lead transaction activity

Real estate transaction activity is likely to be lower for the foreseeable future as investors and financiers take a wait-and-see approach to how the economy recovers. Yet the industrial and logistics sector is set to buck the trend. High quality industrial and logistics real estate is expected to show the greatest volume of transaction activity in the coming year.

At an institutional level, both domestic superannuation funds and global pension funds are underweight industrial and logistics assets. Given the thematic tailwinds driving the sector as noted above, capital will chase these assets. The sheer weight of capital could in turn push prime industrial cap rates (yields) below those of prime office for the first time.

Pricing in the listed and unlisted real estate markets will often diverge in the short-term, creating arbitrage opportunities. What has happened in recent months is not new although as noted earlier, the magnitude of the sell-off in A-REITs was unprecedented.

But looking through the lens of both the listed and unlisted real estate markets, it is clear that retail assets, particularly those focused on discretionary shopping, will continue to underperform and industrial and logistics assets will be the winners for the foreseeable future.

 

Adrian Harrington is Head of Capital and Product Development at Charter Hall, a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any investor.

For more articles and papers from Charter Hall (and previously, Folkestone), please click here.

 

RELATED ARTICLES

Offices will live on in a post-COVID world

A-REITs: what the market gloom is missing

Strong capital flows support non-residential real estate

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

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.