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Australian Retail REITs Retreat as Disruptors Arrive

29 November 2017

Australian Real Estate Investment Trusts (AREITs), who own and operate retail assets, performed poorly for investors and contributed to a 6.3% negative total return over the 2017 financial year – down significantly from 24.6% on the previous year.

The three largest retail AREITs, Westfield, Scentre and Vicinity, who as a group account for around 40% of S&P/ASX 200 AREIT Index, all delivered negative returns over the year to 30 June 2017.

The findings were revealed as part of the 23rd annual BDO AREIT survey, released today.

BDO’s National Leader of Real Estate and Construction, Sebastian Stevens, said the question analysts ask every year is ‘are Australian REITs a good investment’.

“When it comes to the retail sector, the arrival of Amazon and the failure of some global brands in the Australian market – such as Top Shop and Gap – has certainly influenced market sentiment when it comes to the retail REITs and this has played out in the performance of their stock,” Mr Stevens said.

“However, with yields and underlying assets for the major retail A-REITs still performing strongly we think these entities will rebound in the 2018 financial year.”

Mr Stevens added that overall, REITs are a favourable asset class for investors.

“The REITS have managed their portfolio and products very well. Low interest rates continue to be a key driver for the real estate sector, and with no indication that this will change in the near future, we expect investor demand for assets with relatively higher yields, whilst retaining secure income streams,” he said.

“Gearing is also down to its lowest level in a very long time.”

This year the ‘traditional’ commercial property trusts have come out on top with REITs such as Charter Hall, Brookfield, Goodman, Arena and Cromwell all making up this year’s top 10.  Pubs and agriculture REITs are also well represented with ALE Property Group at number two on the index and Rural Funds Group in at number three.

M&A activity highlights:

  • There were a number of transactions in the AREIT sector in FY17, the largest transactions included Northwest Healthcare Properties REIT (a Canadian REIT) completing its acquisition (purchasing a further stake of circa77%) of Generation Healthcare REIT for a consideration of USD$451m
  • The consolidation of Centuria Metropolitan REIT and Centuria Urban REIT took place in April 2017, creating a combined market cap REIT of $430 million
  • Sale of Astro Japan (which has a $1.1 billion portfolio) to Blackstone for a consideration of $430 million
  • With the potential sale of Asia Pacific Data Centres to 360 Capital Group - the market could see further consolidation and M&A activity in the upcoming period
  • 42 building transactions, with a large $3 billion spent by AREITs on individual properties.  One of the largest was Scentre Group’s $360 million purchase of David Jones flagship store in Sydney. 

The survey, now in its 23rd 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 2017.

The survey and video interviews with three REITs – Charter Hall, ALE and Ingenia are available at www.bdo.com.au/AREIT17