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

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.

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. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

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.

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.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

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.