Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 268

A-REITS are looking at M&A activity again

The 2018 financial year, like the previous few years, turned out to be a security picker's market in the listed property, or A-REIT, sector. Performance varied across the 31 stocks in the S&P/ASX300 A-REIT Index, ranging from Propertylink up 34.4% to Stockland Group down 3.6%.

Even within sectors, the performance variation was wide. Among the retail A-REITs, SCA Property Group took line honors with a total return of 18.4% while Aventus, the specialist large format retail centre owner, underperformed with a total return of just 4.7%. It was a similar story in the office A-REITs, GDI Property Group returned 33.8%, while Dexus returned just 7.5%. Among the diversified A-REITs, Abacus returned 25.5% and Stockland negative 3.6%.

Overall, the S&P/ASX300 A-REIT Accumulation Index finished FY18 on a high, returning 13.2%, in line with the broader equities market, with the last three months delivering a strong return of 9.8%. The strength in the A-REIT sector coincided with rising concerns of an escalation in a trade war between United States and China, political tensions in Europe, a pullback in US bond yields and the flattening of the Australian yield curve.

Office and industrial up, residential steady

In the current reporting season, valuations are up and earnings guidance ranges have narrowed towards the upper end supported by solid rental growth across most office and industrial markets. Notwithstanding the broader market concern about the weakening residential sector, strong settlements were recorded across the Stockland, Mirvac and Ingenia residential portfolios.

Darren Steinberg, CEO of Dexus, was on the money when he recently said:

“It is pleasing to see higher market rents being reflected in our latest round of valuations across many of our assets. In addition, valuers have taken into account recent transactions where there has been no softening in the underlying investment demand for good quality office and industrial properties which continue to attract a variety of domestic and offshore buyers.”

Looking ahead, we expect corporate activity to remain elevated reflecting many A-REITs' inability to acquire assets in the direct market at reasonable prices. Finding bargains is next to impossible at this point in the cycle, and to grow, A-REITs are now looking to M&A. And we’ve seen this play before. Back in 1999-2000 and again in 2006-2007, M&As became defining factors in a relative hot property market.

Also, the lower Australian dollar is making the valuations of A-REITs increasingly attractive to foreign acquirers (note the Unibail-Rodamco acquisition of Westfield Group, Blackstone’s bid for Investa Office Fund, and Brookfield and Hometown’s fight for Gateway Lifestyle).

A-REITs trading at the smallest premiums or discounts to NTA will be most prone to being merged or taken private.

Overall, we expect the A-REIT sector to deliver relatively attractive returns given the continued low domestic interest rate environment. The two wildcards are the impact of more M&A activity and A-REITs, like interest rate sensitive sectors, being susceptible in the short term, to any major sell-off in global bond markets.

A-REITs owned by asset allocators

Unfortunately, short-term volatility is now a permanent feature of the A-REIT market. With more of the A-REITs being owned by general equity funds, hedge funds and global investors, the sector is more susceptible to the gyrations of these investors, who move in and out of the sector, at a whim. In January and February 2018, the A-REIT sector returned negative 3.2% and negative 3.3% respectively, as concerns about rising global inflation pushed global bond yields higher. Fast forward to May and June, when concerns about rising bond yields abated, the A-REIT sector rallied, with returns of 3.0% in May and 2.3% in June.

In such an environment, as an active manager that doesn’t follow the weighting of each A-REIT security in the Index, we favour those stocks with exposure to the social infrastructure and specialised property sub-sectors, selected real estate developers and managers that have growing funds management platforms. We also like securities with quality management and relatively attractive yields that have the ability to actively manage their portfolios to drive income growth. Not all A-REITs will perform the same.

 

Winston Sammat is the Managing Director of the Folkestone Maxim A-REIT Securities Fund. Folkestone is a sponsor of Cuffelinks.

For more articles and papers from Folkestone, please click here.

 

RELATED ARTICLES

Listed property headlines disguise full story

Focus on quality yield, not near-term income

State of play in listed real estate

banner

Most viewed in recent weeks

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Latest Updates

Superannuation

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Investment strategies

The two best ways to maximise dividend income

People often marvel at Warren Buffett now getting 60 cents in annual dividends on every dollar he invested in Coca-Cola 30 years ago. What’s often overlooked are the secrets to how he achieved this phenomenal result.

Taxation

The fetish for lower taxes has gone too far

Since the time of Reagan and Thatcher, most business leaders and investors have clung to a dogmatic belief that lower taxes bring higher profits and economic growth. The truth, as always, is far more complicated than that.

Superannuation

Meg on SMSFs: Winding up market linked pensions with care

Due to recently-introduced rules, many people with old style pensions, also known as legacy pensions, will look to wind them up this year. The temporary amnesty allowing these pensions to be stopped should be navigated with care.

Property

Why our Torrens title property system hasn't been adopted elsewhere

Far from an outdated relic, Torrens title appears to be the revolutionary, cheap, low-risk way to handle property dealings. Here's a look at why this Australian invention from the 1850s hasn't caught on more widely.

Property

DigiCo REIT and the data centre opportunity

Data centres offer compelling growth prospects. But their potential hasn't gone unnoticed, and DigiCo appears to be buying properties in a seller’s market, resulting in better opportunities being found elsewhere.

Retirement

The $1.2 trillion sea change facing Australian investors

Over the next decade, three million Australians will shift from accumulating wealth to living off it. Those taking part in the great migration need a sound strategy that delivers sustainable income and protection from market bumps.

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.