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.

 

  •   23 August 2018
  • 1
  •      
  •   
1 Comments
Fundie
August 23, 2018

Not to mention Charter Hall buying Folkestone ...

 

Leave a Comment:

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

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

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.