A strong recovery for the A-REIT sector.
Investment research house Lonsec Research Pty Ltd (Lonsec) said Australian listed property securities funds have seen a strong recovery in performance across the Lonsec peer group over the last 12 to18 months, as fund managers benefit from a rebounding A-REIT sector.
In particular, the headline S&P / ASX 200 A-REIT Accumulation Index (XPJ) rose by 24.2% over the twelve months ended 30 June 2013, with the Lonsec ‘actively managed’ peer group recording a commensurate annual return of 24.1%. This strong performance has seen the A-REIT sector outperform both the global REIT sector and the broader Australian equity market over this time period.
The Lonsec Australian Listed Property Securities Sector Review, which covered 22 actively managed funds, five ‘passively managed’ funds and five ‘hybrid’ funds, found the sector has recovered from the losses experienced during the global financial crisis (GFC).
Peter Green, Senior Investment Analyst, Lonsec said there were three key factors contributing to the recent performance.
“The global quest for yield in a low interest rate environment has had quite an impact, with offshore and local investors attracted to the sector by the strong distribution rate.”
“This, coupled with the favourable earnings outlook across the A-REIT sector, has also underpinned recent investor support, with the sector awash with ‘cheap’ debt and equity that has significantly lowered the cost of capital and will allow A-REITs to accelerate their development pipeline,” Mr Green said.
“Finally, institutional interest has been a strong tail wind for listed fund managers such as Goodman Group and Charter Hall Group.”
Sins of the past
Lonsec noted in last year’s sector review that strong balance sheets had again become a feature of the A-REIT sector, following a prolonged period of sector-wide austerity.
“A-REIT boards continued their efforts unwind the aggressive capital structures evident in the lead up to the GFC, including selling non-core assets and exiting offshore property platforms,” said Mr Green.
“While these exhaustive efforts have led to A-REITs being able to raise their creditworthiness, the past continues to haunt fund managers in longer-dated returns.”
“For instance, the Lonsec ‘active’ peer group still has a seven year negative absolute return; therefore, the strong performance of the last 12-18 months is coming off a low base and the average long-term investor has underperformed the broader Australian equity market.”
Back to the future
Much has been made of the ‘back to basics’ approach adopted by current A-REIT boards, with strong sector returns over the last few years being the reward.
“We observe that the current quest for yield across the sector is a similar thematic to that which drove much of the excesses in the lead up to the GFC,” said Mr Green.
“More recently, the sector has seen a return of Initial Public Offerings (IPOs) promising to deliver yield, a rise in pay-out ratios and a move across the sector to sell stakes in key assets to third parties.”
“In this environment, stock picking may well be a significant driver of alpha, which in turn may prove a fillip for the more experienced active teams with ‘through the investment cycle’ knowledge of the sector,” Mr Green said.