Australian Real Estate Investment Trusts – the right time to invest?
Source: AMP Capital
In this article Australian real estate investment trusts (REITs) are up for discussion, and what they can offer investors who are seeking a diversified portfolio with good risk adjusted returns.
In the recent sell-off of global equity markets, A-REITs have also been sold down (though much less than the broader Australian equity market). However, the property fundamentals of REITs remain strong as property valuations continue to improve – this is illustrated by 4% Net Tangible Assets growth in the recent reporting season results.
The defensive (low risk) nature of this asset class is demonstrated by the quality and characteristics of the REIT income streams, being contractual rent with lease terms from five to 20 years. These are often linked to annual Consumer Price Index increases and with the high quality tenants.
The yield nature of REITs and sustainable distribution payout ratios – with up to 4% growth – will continue to provide investors with access to Australia retail and commercial assets for the smaller investor.
The REIT sector has been a major beneficiary of investor appetite for yield and defensive low risk investment, particularly after the Global Financial Crisis and the attraction as a defensive asset class remains.
It is believed investors should expect REIT total returns to moderate in the medium-term as the high teen returns over the past one to six years are certainly not sustainable for this asset class. However, higher quality REITs present good opportunities to provide investors with fundamental property-like returns over the medium to long-term.
REITs are well positioned to deliver growing distribution yields to investors. This is due to income security (being contractual rental income), their well-capitalised nature, the current low interest rate environment and the direct commercial property market increasing further in value.
A major benefit of investing into REITs is it allows retail investors to access high quality commercial and retail property in Australia without significant transaction costs and provides diversified property exposure.
Traditionally the REIT market could be divided into retail, office, diversified (some residential) and industrial. Over the past few years the investment choice has expanded to include healthcare assets, retirement properties, storage facilities and childcare centres. The Australian market is merely playing catch up compared to the US REIT market where most of these property asset classes have traded in REIT form for many years. Indeed the outlook is promising as further property asset classes are securitised such as retail centres, student accommodation, education facilities, hospitals and petrol service stations.