Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 210

Listed property headlines disguise full story

A cursory look at the headline performance of the Australian listed property trusts, or as they are now more commonly known, Australian real estate investment trusts (A-REITs), would suggest all is not well. The S&P/ASX300 A-REIT Index posted a total return of -5.6% in the year to 30 June 2017, underperforming the equities market, which returned 13.8%. The underlying direct property market returned circa 12%.

The headline index performance is deceiving and the composition of the S&P/ASX300 A-REIT Index is fundamentally flawed. Like most indices, it is weighted by the market capitalisation of each security. The larger A-REIT securities such as Scentre (ASX:SCG), Westfield (ASX:WFD) and Stockland (ASX:SGP) have a higher weighting in the Index. It says nothing about the merit of a particular security.

Investors are continually reminded not to put all their eggs in one basket and avoid taking concentration risk. We are told to diversify, diversify, and diversify. Yet the A-REIT Index fails that test. The top eight A-REITs comprise a staggering 78% of the Index by market capitalization, as shown in the figure below. The performance of these A-REITs has a massive influence on the Index and the sector.

S&P/ASX 300 A-REIT Index Market Capitalisation – June 2017

Source: IRESS

 

Impact of the largest companies

The median performance of the top eight A-REITs by market capitalisation was -3%. The big guns, apart from Goodman Group (14.3%), were hit particularly hard – Westfield (-21.5%), SCentre (-13.4%) and Vicinity (-17.3%) as can be seen in the figure below.

A-REITs Performance – 12 Months to 30 June 2017

Source: IRESS

The sell-off in the larger cap stocks was driven mainly by two factors.

Firstly, concerns about the retail sector saw Westfield, Scentre and Vicinty sold-off (like several of the listed retailers) despite all three owning some of the best retail assets in the country.

Secondly, in recent years the A-REIT sector has attracted significant inflows from institutional and global capital chasing its attractive yield. However, as bond yields started rising (the 10-year bond yield rose from 2% to 2.6% during FY17) the sector’s ‘bond-like’ defensive characteristics become less attractive to some investors. The larger, more liquid A-REITs, in particular, came under pressure. Some institutional and global investors started to rotate out of A-REITs into other cyclical sectors of the equities market or redeployed their capital into offshore markets.

At the other end of the scale, the median performance of the smallest eight A-REITs in the Index was a positive 9.9% for the year to 30 June 2017. Of these, Rural Funds Group, GDI Property and Arena REIT were the standouts, delivering stellar returns to investors.

 

Index does not cover the whole market

Another flaw in the Index is that it only captures 31 listed A-REITs. There are another 15 that are considered too small to be included, typically with a market capitalisation below $350 million. For institutional investors, these A-REITs are not big enough to invest in. Many outside the Index are well managed, have excellent real estate portfolios and performed well in the past year, including Centuria Metropolitan Office REIT (25.5% return) and Australian Unity Office Fund (11.4% return).

Finally, the Index is flawed given its sector composition does not reflect the broader real estate market. Retail A-REITs comprise 45% of the Index, well ahead of diversified A-REITs at 27%, office and industrial A-REITs both at 12%, and specialised A-REITs is a minnow comprising just 4% of the Index. Office, retail and industrial are far more dominant sectors across the real estate landscape.

If we drill down to the underlying asset level and include the retail centres owned by the major diversified AREITs – GPT, Stockland, Mirvac – the exposure to retail is more than 50% of the total assets owned by the sector. Given the structural and cyclical issues currently facing retail, that is a massive bet on the retail sector for anyone invested in the Index.

The arrival of international retailers in recent years including Zara, H&M and Uniqlo has reshaped retail. At the same time, local retailers such as Dick Smith, Payless Shoes and Rhodes & Beckett have disappeared. Retail sales numbers reveal anaemic spending, and the growth of online retail spending continues to gain momentum, even before the Amazon juggernaut hits our shores. It is not surprising that the past year median performance of the retail A-REITs was down 9.5%.

As the past year has shown, the overall performance of the A-REIT Index masks a wide variation in performance across individual A-REIT securities. FY18 is unlikely to be any different given the way the Index is constructed and the likely on-going short-term volatility in A-REIT pricing. Investors who are prepared to avoid using a passive market cap index fund can go hunting for individual A-REIT securities based on merit and attractive pricing. Otherwise, investing with an A-REIT securities fund manager that utilises a high conviction, benchmark (index) unaware investment process, will be well placed to deliver returns well above the headline A-REIT Index in the year ahead.

 

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

RELATED ARTICLES

Reporting season winners and losers in listed property trusts

Focus on quality yield, not near-term income

A-REITS are looking at M&A activity again

banner

Most viewed in recent weeks

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 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.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

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.