According to the annual BDO survey, now in its 25th year, industrial continued to be the best performing category, showing a hefty overall return of 55.8% – more than double the return on the previous year. Goodman Group, which has a pure industrial play, topped the annual survey as the best performing company.
BDO’s National Leader for Real Estate and Construction, Sebastian Stevens, said the performance of the Industrial REITs was driven by the value of high-quality assets in urban corridors that command strong rents, underpinned by the continued strength of eCommerce.
“Online shopping continues to fuel demand for fulfilment centres for retailers. They want well-located distribution centres to efficiently service their shops and customers. This has been good news for REITs such as Goodman and is resulting in a surge in speculative industrial development,” Stevens said.
“Australia is currently the *10th largest eCommerce market in the world by revenue and doesn’t look like slowing down with estimates for the market size to be about A$35.2 billion (US$ 25.2 billion) by 2021.”
“In the past, logistics were seen as the ugly-duckling in corporate real estate, but they’re now the most sought after assets, particularly on the Australian east coast.”
“A key theme uncovered in our research is that all categories are witnessing some form of asset shapeshifting - adaptations to traditional or existing formats - such as:
- Industrial & Logistics – transformation of retail space into distribution formats. This has been witnessed by Dexus’s recent acquisition of Homemaker Prospect, a 25,770sq m large-format retail centre near Blacktown, for about $65 million with plans to convert it to industrial use over time. The trend follows the US market which has seen logistics and warehouse space converted from retail taking advantage of prime real estate in the middle-rings of capital cities
- Retail – with sluggish sales and changing delivery demands, retailers are looking to reconfigure stores to reduce the size of the shop front and reuse the space for processing and dispatching orders for fast local delivery. There is also a continued trend for shopping centres and larger format retail sites to become ‘living centres’ which incorporate activities such as gyms and fitness centres, healthcare, co-working areas, fine dining options and accommodation - as shown with the opening of a Sofitel hotel at Melbourne’s Chadstone Shopping Centre’s.
- Offices – increased sub-letting by corporate tenants and the rise of co-working spaces has had an impact on the office market. The number of co-working or flexible office spaces rose from *78 sites in 2013 to more than 400 across Sydney and Melbourne.
GPT was the first AREIT to open a co-working/flexible workspace in 2014, with the launch of Space&Co at Melbourne Central.
The Top 10 Performers in BDO’s AREITs 2019 Survey are:
- Goodman Group – worth *$26 billion – an increase in value by $7.2 billion over the past year. Total assets under management at $48 billion. On the back of the boom in e-commerce, Goodman Group bought and developed warehouses to cater to online shopping and subsequent distribution needs of retailers. Key clients include Amazon and Walmart. Highlights: Total shareholder return of 59% over one year and 123% over three years with a 15% increase in NTA per security to $5.34.
- Charter Hall Group – investments in high-quality office, retail and industrial spaces with a large presence of corporate and government tenants. Highlights: Total shareholder return of 71% over one year and 133%over three years with a premium to NTA of 182%.
- National Storage REIT – internally managed and fully integrated owner-operator of commercial and residential self-storage. Highlights: 8% increase in NTA per security to $1.63 and operating cash yield of 9%.
- Shopping Centres Australasia Property Group - sub-regional and neighbourhood shopping centres and freestanding retail assets focused on convenience retailing across Australia. Owns a diversified shopping centres portfolio valued at c.$2.5 billion. Highlights: 88% unannualised liquidity, distribution return of 6%.
- Dexus – diversified portfolio of office and industrial stock. Highlights: 9% increase in NTA per security, total share return of 39% over one year with premium to NTA of 29%.
- Garda Diversified Property Fund - office and industrial property with 17 assets. Highlights: total shareholder return of 28% over one year and 63% over three with operating cash yield of 10%.
- Cromwell Property Group - a property fund manager of commercial properties who have total assets under management of $11.5 billion across Australia, New Zealand and Europe. Highlights: distribution return of 6% and 72% tax-advantaged distribution.
- Mirvac Group - principally located in Australia's four key cities of Sydney, Melbourne, Brisbane and Perth, Mirvac owns and manages assets across the office, retail and industrial categories, with over $18 billion of assets currently under management. Highlights: total shareholder return of 49% over one year and 71% over three; 8% increase in NTA per security to $2.50.
- Rural Funds Group - Rural Funds Group (RFF) - is a unique Australian real estate investment trust engaged in leasing of agricultural properties and equipment to experienced agricultural operators (tenants). Highlights: operating cash yield of 10%, a total shareholder return of 65% over three years, premium to NTA of 32%.
- Centuria Industrial REIT – Australia’s largest industrial property focused REIT with a portfolio of 45 property assets in key metro areas. Highlights: operating cash yield of 7% with distribution of 6%.
The AREITs delivered a total return of 13.4% over the 2018-19 financial year (S&P/ASX 200 AREIT Accumulation Index). This outperformed the broader market (S&P/ASX 200 Accumulation Index) by 6.2% and was a similar result to the previous year which delivered a 13.2% return.
“AREITs continued to provide a safe haven for investors compared to other more volatile stocks such as tech. The performance was also underpinned by lower interest rates,” Mr Stevens said.
“The median premium to Net Tangible Asset for AREITs in FY19 was 13%, propelled by the strong returns delivered by the Industrial REITs.
“Gearing for the AREIT sector, a constant theme in recent years sits at 30% (up from 25.9% in FY18) with a weighted average cost of debt decreasing from 3.8% in FY18 to 2.1% in FY19 off the back of all-time low bond yields and interest rates.
“In terms of capital flows, FY19 saw $10 billion raised in secondary debt and equity markets, slightly down by $0.8 billion on the previous year.
“Key raising activities were: Unibail-Rodamco-Westfield ($5 billion); Dexus ($1billion) GPT Group ($0.9billion).
“Looking ahead the AREITs will continue to look at diversification in their portfolios with a focus on quality assets which attract blue-chip tenants as investors seek security in the face of slowing economic conditions.”
Matthew Madsen, Executive Chairman, Garda Diversified Property Fund commented that a key challenge for the sector in the next 12-months would be that economic activity across the board appears to be weak at best.
“Tenants, particularly those with offshore parents are deferring leasing decisions and the “stay put” option is the biggest challenge to new office leasing,” he said.
Rob De Vos, Managing Director, Arena, added: “There is increasing interest in the social infrastructure property sector both domestically and offshore as investors better recognise the growing accommodation needs for services as a result of population growth and changing community needs; as well as investors seeking diversification from traditional property assets such as retail, office and industrial.”
The survey, now in its 25th 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. The full report and analysis is available here.