Traditional REITs Return to the Top in Annual Survey

14 December 2016

The ‘traditional’ commercial and industrial property trusts have returned to the Top 10 in the annual Australian real estate investment trusts (AREITs) performance survey, released today by leading global audit, tax and advisory firm BDO.

The survey, now in its 22nd 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 2016.

The trusts had a total return of 24.6% in the financial year 2016, following a 20.2% total return in 2015 and an 11% total return in 2014. 

BDO’s National Leader of Real Estate and Construction, Sebastian Stevens, said record low bond yields had supported the profitability of A-REITs over the past few years.

“A-REITs outperformed equities in the last three years and have been strong in comparison to other sectors such as banking, metals and mining,” Mr Stevens said.

“The low Australian interest rate environment continued to provide a significant boost to the sector as the high yields and solid returns proved attractive to investors.  However, recent increases in global bond yields has seen a significant sell down on both A-REIT shares and listed real estate trusts in the US, UK, Singapore and Hong Kong.

“Despite the risk that increases in bond yields will continue to put pressure on the value of listed property stocks, AREITs should still prove popular with investors because of strong underlying fundamentals.”

“The current short-term market volatility doesn’t stop them from being an attractive buy and continued low interest rates means there’s likely to be ongoing success for the sector.”

“Historically, A-REIT’s have been viewed as stable distributions that have had low share price volatility to match predictable returns.  As with BDO’s two most recent A-REIT surveys, the sector has delivered on that commitment, and more, with earnings growth, asset valuation gains and a low cost of debt again being the keys to success for many trusts in the sector. Despite share price reactions to trends in other low yield low risk investments, the foundations of A-REIT investments are likely to remain stable.

“In 2014 and 2015 we saw the rise of the niche trust and this year four of the top 10 performing trusts were again representing non-traditional asset classes, but the ‘traditional’ commercial property trusts have made a comeback with REITs such as Brookfield, GPT, Cromwell and Goodman making this year’s top 10.”

Brookfield Prime Property Trust came in at number one with a net profit of $149.8 million followed by freehold pub property trust ALE Property Group and agricultural trust Rural Funds Group.

Average sector gearing remained steady at circa 30% and weighted average cost of debt continued to fall in line with interest rates from 4.6% to 3.3%, a continued bonus to REIT earnings and distributions.

“The AREITs look to be ‘making hay while the sun shines’ by de-risking for the future, with a number of REITs re-aligning their debt structures with low interest rates and longer term debt facilities,” Mr Stevens said.

“Overall, in a unique period for the Australian economy, it is high yield, defensive sectors that are delivering returns from capital growth with assets that have traditionally provided most of their returns through income.  With the current high yields, strong underlying asset values and with continuing low interest rates, it appears AREITs will continue to be a strong sector going forward, although increased yields in the bond market will now increasingly influence the A-REIT market.”

The BDO 2016 A-REIT survey is now available.