Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 316

A-REITs outperform but will it continue?

The A-REIT (Australian Real Estate Investment Trusts) sector generated a total return of +19.4% in 2018/2019, outperforming the broader S&P/ASX300 Accumulation Index return of +11.4%. The returns were heavily skewed to the second half of the financial year and largely driven by firming bond yields and the rotation of capital into the yield sectors such as A-REITs and infrastructure. A-REITs also outperformed the Global REIT benchmark.

A-REIT and global REIT returns

The A-REIT index was boosted by the industrial and office sectors that delivered +57.7% and +33.4% respectively in FY19, whilst the retail sector delivered -7.6%.

At the security level, the dispersion of returns between the best and worst performing A-REITs was one of the largest on record, as shown below. The x-axis corresponds to the ASX codes.

A-REIT returns by Security: Year to June 2019

Source: IRESS

Massive difference in performance

The best performing A-REITs in FY19 were the fund managers, led by Charter Hall Group (ASX:CHC) at +72.4% and Goodman Group (ASX:GMG) at +59.9%. Both platforms benefited from strong demand for their real estate funds, their access to the strongly-performing office (CHC) and industrial logistics (CHC and GMG) sectors and the embedded performance fees in a number of their funds.

Unibail-Rodamco (ASX:URW) and Scentre Group (ASX:SCG) recorded negative annual returns, delivering -27.5% and -7.7% respectively. This was driven by concerns over their significant exposure to the discretionary retail sector. Vehicles exposed to non-discretionary retail spend, including convenience centres, such as Charter Hall Retail (ASX:CQR) and SCA Property Group (ASX:SCP) fared much better.

We have witnessed a significant flow of capital from domestic and global general equities managers into A-REITs, with higher multiples being paid by investors seeking the relatively-secure earnings growth in the sector. Many A-REITs took advantage of the strong appetite for yield and raised more than $3.7 billion in the past six months, $1.7 billion of which was raised in June 2019 alone. This was the highest level of equity raised since 2009 when the sector was forced to recapitalise at the height of the GFC. Anecdotal evidence from the investment banks indicates each of the raisings were significantly oversubscribed.

In addition, there was more than $4.2 billion in A-REIT debt issuance in the first half of 2019. The US private placement market was a key source of debt finance, with four A-REITS (GrowthPoint, GPT, Mirvac and Stockland) tapping the US debt market, securing $1.7 billion in borrowings with tenures of between 10 and 14 years and margins between 170 and 224 bps.

Market snapshot

Office

Australia’s main office markets are well-positioned with historically low vacancy rates and modest supply levels. This has led to strong rental growth along the east coast. The Sydney CBD vacancy rate is the lowest it has been in 18 years, while Melbourne’s vacancy rate is at a 10-year low. Vacancy rates in Brisbane and Perth are now falling on the back of positive demand. Given the strong positive office market fundamentals, capital values are expected to be supported by continued investment demand from A-REITs, superannuation funds and foreign investors.

Retail

The retail sector has been impacted by a combination of cyclical and structural issues. Cyclically, retail sales have been under pressure due to higher living expenses that have not been offset by wage growth. Structurally the market, particularly discretionary retail, is suffering from the rise of e-commerce. FY20 retail sales are expected to be boosted by the flow through of the Coalition’s tax refund plan. This will see $7.6 billion tax refunds (~0.4% of GDP) flow to consumers, with a large proportion of the refunds to be spent on retail consumption.

Industrial

The structural trends of urbanisation, rising e-commerce and the need for convenience is requiring logistics providers to reconfigure their supply chains. This has led to strong demand for urban industrial premises and higher investment into state-of-the-art distribution centres, driving longer leases. A significant pipeline of infrastructure projects and a lower AUD has also benefitted demand, leading to rental growth in most regions. The investment market is expected to remain strong given solid rental growth expectations and demand from institutions underweight the logistics sector.

Residential

Optimism appears to have returned to the housing market, following the Federal Election, RBA cuts and APRA easing of lending buffers. Whilst sentiment is up, this positive shift will take time to filter through the market and positive earnings of those A-REITs exposed to the residential sector.

The outlook for A-REITs

With interest rates at record lows and continuing low inflation, there are not many options for investors seeking a healthy yield. A-REITs is one sector that investors will focus on.

The sector benefits from solid operating fundamentals, low gearing and strong interest cover, good dividend coverage and demand for institutional grade real estate. A continuation of low interest rates, reasonable consumer confidence, and corporate activity (M&A) will support the sector. The lower Australian dollar adds to the appeal for offshore investors.

The sector is offering a 4.5% dividend yield, with forecast growth in dividends of ~3% per annum for the next four years. Profit growth is reasonably predictable driven by contractual rental arrangements and annuity-type management fees. Unlike some of the broader industrial companies, there are few question marks over A-REIT dividends.

In perspective, the current A-REIT dividend yield is 3.5x the current 10-year bond yield and 4.5x the cash rate. The greatest risk to the sector is a rising in bond yields, which would negatively impact pricing. This seems unlikely at the moment, but as the past year has shown, not all A-REIT are equal, and there will be winners and losers. This is a market for active stock-pickers.

 

Patrick Barrett is Portfolio Manager, Listed Securities at Charter Hall, a sponsor of Cuffelinks. This article is for general information purposes only and does not consider the circumstances of any person, and investors should take professional investment advice before acting.

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

 

RELATED ARTICLES

David Harrison on the hot spots in property

Let’s stop calling them ‘bond proxies’

Pub property: a parma, a pint and a profit

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

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.