Navigating choppy waters: Findings from BDO Australia’s 28th Annual Survey of Australian Real Estate

Australian Real Estate Investment Trusts (A-REITs) have endured a tumultuous year gripped by inflation, geopolitical tensions, and the remnants of the COVID-19 pandemic, underperforming the S&P/ASX 200 Index by 5.1 per cent and delivering a total negative return of 15.4 per cent.

The long-running BDO Australia A-REIT survey, now in its 28th year, found that all market sectors, including industrial, retail, office, and diversified, delivered negative returns for FY22, a complete reversal of FY21’s result when all sectors registered a positive return.

The decline for A-REITs comes after a remarkable performance in FY21 where it outperformed the S&P/ASX 200 Index by 7.1 per cent and delivered a positive return of 31 per cent.

The performance U-turn began with the surge in the Omicron variant of the COVID-19 virus and the increase in long bond yields as a result of rising interest rates and inflation causing consumer confidence and property valuations to erode.

Increases in bond yield typically stress A-REIT valuations due to their higher leverage when compared with other asset classes, especially as many A-REITs have taken advantage of an extended period of cheaper borrowing.

The median discount to NTA for A-REIT’s in FY22 was 17.4 per cent, implying that current unit price valuations are not reflective of the underlying assets held by the A-REITs.

The best performers include Arena REIT, Hotel Property Investments, Shopping Centres Australasia Property Group, Charter Hall Retail REIT, and National Storage REIT, which make up the top five this year.

BDO in Australia’s A-REIT specialist and Corporate Finance Partner, Sebastian Stevens, said the outlook for A-REITs remained strong, with results over the past year mirroring public sentiment as the RBA began tightening monetary policy.

“A-REITs enjoyed a recovery high last year, but broader macroeconomic impacts, local impacts, and negative market sentiment have contributed to a perfect storm that has led to this downturn,” said Mr Stevens.

“Interest rate rises have depressed a lot of valuations over the past year and the economic uncertainty has had a double impact in lowering the public’s perception of value.”

“In some cases where some of those A-REITs whose share prices have fluctuated, if you look at the underlying earnings, not much is happening there; it is just the market sentiment that is causing a swing.”

“This perfect storm is likely to evaporate over the next year if we can get inflation under control and we'll see a strong bounce back for A-REITs.”

All market categories underperformed their FY21 result during FY22, with the diversified category performing the worst with -24.3 per cent (FY21: 35.9 per cent), followed by office with -16.6 per cent (FY21: 16.4 per cent), industrial with -16.2 per cent (FY21: 41.4 per cent), and retail with -1.6 per cent (FY21: 22.4 per cent).

“If you look at each of the market sectors, they have different challenges that are impacting their performance,” said Mr Stevens.

“Retail has held up well but concerns around discretionary spend have now crept in because interest rate rises puts pressure on disposable income.”

“The office market is still suffering from contemplation around this new flexible working environment, while economic pressure will see tenants looking to reduce their footprint in an attempt to save on rental expenses.”

“Industrial, which was the best performer last year, is a victim of its own success as demand for warehousing, transport, and logistics facilities have eased with the corresponding softening in retail.”

The BDO annual survey of A-REITs, now in its 28th year, ranks the S&P/ASX 200 A-REIT Index trusts based on key financial and investment indicators in the 12 months to 30 June each year.

Top 10 A-REITs 2022

1. ARENA REIT

Arena REIT (ASX:ARF) is a constituent in the S&P/ASX 200 Index that develops, owns, and actively manages social infrastructure properties across Australia. They invest in social infrastructure properties in growing sectors that are supported by demographic and economic trends. Currently, their portfolio contains 256 properties that are 100per cent per cent occupied by a diverse tenant base in the childcare and healthcare sectors. As at the date of this report, the total value of the portfolio is $1.31 billion.

Highlights:

23 per cent one-year return
72 per cent three-year return
32 per cent increase in NTA
46 per cent premium to NTA

Annual report insights:

Arena REIT was able to mostly evade the effects of COVID-19 through their macroeconomic investment approach and focus on early learning, healthcare, and education. Statutory net profit grew by 102 per cent between FY21 and FY22. This was primarily due to the increase in net operating profit, higher property revaluation gain compared to FY21, and a higher revaluation of derivatives. Further, net operating profit increased by 8.4 per cent due to the increase in rental income arising from periodic rent reviews, lease commencements upon completion of early learning centre developments, and new acquisitions. Over FY22, Arena REIT added nine early learning centre development sites and seven operational early learning centres to their portfolio.

2. HOTEL PROPERTY INVESTMENTS

Hotel Property Investments (ASX:HPI) is an A-REIT with a mandate to primarily invest in pubs and associated specialty stores located on pub sites. The majority of the portfolio is located in Queensland and are freehold sites. Currently, Hotel Property Investment’s portfolio is valued at $1.3 billion and is comprised of 62 properties.

Highlights:

100 per cent tax advantaged distribution
27 per cent increase in NTA
7 per cent operating cash yield
4 per cent one-year return

Annual report insights:

Hotel Property Investments recorded a total profit after tax in FY22 of $211.4 million including a fair value gain on investment properties of $171.3 million. Moreover, during FY22, Hotel Property Investments increased their portfolio by nine properties across Victoria and South Australia.

3. SHOPPING CENTRES AUSTRALASIA PROPERTY GROUP

SCA Property Group (ASX:SCP) is an A-REIT which owns a diversified shopping centre portfolio throughout Australia. As at the date of this report, there are 91 assets under management which are valued at $4.5 billion. SCA Property Group primarily focuses on convenience retailing through ownership and management of neighbourhood and sub-regional shopping centres and freestanding retail assets.

Highlights:

15 per cent one-year return
32 per cent three-year return
4 per cent premium to NTA

Annual report insights:

During FY22 SCA Property Group was impacted by the COVID-19 pandemic in terms of both operational and financial performance. Further impacts include volatility in retail sales performance of tenants, government-imposed trading restrictions on tenants, and mandated rental relief moratoriums. Despite this, SCA Property Group increased net profit after tax to $487.1 million and consequently increased the distribution per security to 15.2 cents. SCA Property Group completed nine acquisitions across Queensland, New South Wales, and Victoria with a total value of $347.5 million. Moreover, SCA Property Group disposed of eight properties for a total value of $307.6 million at an average premium to book value of 9.5 per cent.

4. CHARTER HALL RETAIL REIT

Charter Hall Retail REIT (ASX:CQR) is the leading owner of convenience retail shopping centres and long WALE assets in Australia and New Zealand with a total portfolio value of $4.3 billion. The portfolio is comprised of 572 properties with an occupancy of 99 percent. Further, Charter Hall Retail REIT employs an active asset management strategy and enhances portfolio quality through engaging with major tenants.

Highlights:

6 percent distribution return
53 per cent tax advantaged distribution
22 per cent increase in NTA
6 per cent one-year return

Annual report insights:

During FY22, Charter Hall Retail REIT’s property portfolio increased 18 per cent in value from FY21 which was a primary driver in the 22 percent increase in NTA per unit. Charter Hall Retail REIT attributes their continued growth to the development of strong relationships with tenants such as Wesfarmers, Coles, Woolworths, ALDI, and Ampol. It is part of the group strategy to enhance the quality of the portfolio through the acquisition of resilient and defensive assets.

5. NATIONAL STORAGE REIT

Founded in 1995, National Storage REIT (ASX:NSR) is the largest self-storage owner and operator across Australia and New Zealand. The group serves more than 90,000 residential and commercial customers over 226 storage centres. As at 30 June 2022, investment properties held by the Group were valued at $3.73 billion.

Highlights:

24 percent increase in NTA
13 per cent one-year return
37 per cent three-year return

Annual report insights:

During FY22, National Storage REIT increased their total revenue by 28 per cent while improving their underlying earnings by 46 per cent. This allowed the group to increase their distribution per security by 22 per cent. One factor assisting with bottom line growth is the increase in the value of investment properties by 26 per cent. However, this was not due solely to fair value adjustments, National Storage REIT added 15 centres and improved occupancy by 2.8 per cent during FY22.

6. GARDA PROPERTY GROUP

GARDA Property Group (ASX:GDF) is a real estate investor, developer, and manager in the industrial and commercial office sectors. Their current portfolio of 18 properties is valued at $650.7 million, spread across Melbourne, Brisbane, Cairns, and Mackay.

Highlights:

41 per cent increase in NTA
25 per cent one-year return
25 per cent three-year return

Annual report insights:

GARDA Property Group was able to deliver return on equity of 46 per cent to their investors, and finish FY22 with a 39 per cent relative over performance when compared with the A-REIT Index. Moreover, GARDA Property Group’s portfolio increased in value by 31 per cent, primarily due to property revaluations which drove the 41 per cent increase in NTA. GARDA Property Group’s overall strategy is to act as a long-term owner of real estate and to remain market cycle aware. The group’s strategy is focused on the commercial office and industrial sectors, as well as debt investments into residential developments.

7. CHARTER HALL GROUP

Founded in 1991, Charter Hall Group (ASX:CHC) is an integrated property group that manages listed and unlisted property funds, worth over $69.1 billion, on behalf of wholesale, institutional and retail investors. Charter Hall Group invests in all core classes of property, including retail, industrial, social infrastructure, and commercial.

Highlights:

96 per cent premium to NTA
21 per cent operating cash yield
12 per cent three-year return

Annual report insights:

Charter Hall Group’s strategy is broken down into four steps, accessing equity from listed wholesale and retail investors, deploying capital into attractive investment opportunities, managing funds and assets, and investing alongside capital partners. It is this structured and well-executed plan which has made Charter Hall Group, as well as their other listed REITs, mainstays within our top 10 performers. During FY22, Charter Hall Group completed $8.5 billion in gross property transactions and increased property funds under management by 26 per cent.

8. VICINITY CENTRES

Vicinity Centres (ASX:VCX), previously known as Federation Centres and Centro Properties Group, is an A-REIT specialising in the ownership and management of Australia shopping centres. As of June 2022, it had stakes in 60 shopping centres, with over 6,800 retailers under their management. The investment properties held by the group are valued at $14.37 billion.

Highlights:

26 per cent one-year return
6 per cent operating cash yield
48 per cent liquidity

Annual report insights:

In FY22, Vicinity Centres showcased a 16 per cent improvement in sales on the second half performance of FY19, which shows growth on pre-COVID levels. The group boasted a $1.215 billion statutory net profit after tax and 22 per cent total securityholder return. There was also a $554 million increase in asset valuation. The group also experienced stability in the occupancy rate as it remained relatively unchanged through FY22.

9. CHARTER HALL SOCIAL INFRASTRUCTURE REIT

Charter Hall Social Infrastructure REIT (ASX:CQE) is the largest Australian Property trust investing in social infrastructure properties within Australia and New Zealand. The group current holds 368 properties with a gross asset value of $2.1 billion. Out of these 368 properties, they boast a 100per cent occupancy rate.

Highlights:

26 per cent increase in NTA
2 per cent one-year return
6 per cent three-year return

Annual report insights:

Charter Hall Social Infrastructure’s gross assets grew by 35 per cent in 2022 to $2.1 billion. $1.97 billion of this is attributable to their property portfolio, which grew by 39 per cent. This is driven by a valuation uplift of 19 per cent equating to $269.4 million and new acquisitions of $232.7 million. The group were able to increase their NTA per unit by 26 per cent to $4.08. Further, the group delivered operating earnings of $62.9 million, representing a yearly increase of eight per cent.

10. ASPEN GROUP LIMITED

Aspen Group Limited (ASX:APZ) is a leading provider of quality accommodation in the residential, retirement and short stay sectors. The group holds 18 properties and over 2,950 sites and dwellings valued at $366.06 million. Despite all of this, the group still managed to materially increase earnings and net asset value per security due to a massive growing demand for their more affordable accommodation.

Highlights:

58 per cent three-year return
17 per cent one-year 1-year return
32 per cent increase in NTA
7 per cent Operating cash yield

Annual report insights:

Aspen Group Limited generated a statutory net profit of $75.38 million and Operating Earnings of $11.84 million. Their total rental and ancillary services revenue increased by 22 per cent to $17.25 million. Property net operating income also increased by 17 per cent to $14.84 million. Most impressively, the groups’ property portfolio expanded by 80 per cent in the last year to over $412.59 million, through valuation gains and acquisitions. During the year, they acquired the Perth Apartment Portfolio in WA consisting of 514 apartments for $52 million.

Jotham Lian
Manager, Media
E; Jotham.Lian@bdo.com.au
Ph: +61 2 8221 2290