Not all AREITs are created equally


Dugald Higgins

The 12 months to 31 May 2019 were positive for Australian Real Estate Investment Trusts (AREITs), with the S&P/ASX 300 AREIT Accumulation Index returning 14.3% and the FTSE EPRA/NAREIT Developed $A (Hedged) Index returning 10.6%.

Despite this overall result, the last two years have proved challenging for many of Zenith’s rated active fund managers, particularly in AREITs. According to Zenith’s 2019 Property Sector Report, the reason lies in the disparity between the characteristics of certain key AREITs which goes against the philosophy of many fund managers.

Zenith’s Head of Property & Listed Strategies, Dugald Higgins, explains: “The AREIT market has several defining characteristics which can result in some unexpected outcomes at various points of both the property and economic cycles.”

“Unlike the rest of the world, Australia has a more relaxed approach when it comes to how AREITs can generate earnings. For example, while most AREITs are invested solely in property, others have significant exposure to development and funds management.

“The differences across AREIT structures, fund objectives and manager’s risk appetite for more volatile/non-property earnings can and has resulted in large dispersions in fund outcomes at certain points in the market cycle,” said Higgins.

“As a result, amongst Zenith’s rated AREIT funds, median performance dispersion relative to the market benchmark reached its highest level in 20 years.”

“Given the differences in approach and objectives, some funds are less able to participate fully in the momentum being generated in the index by stocks which are viewed as being less property-like,” said Higgins.

“That’s why it’s important when choosing an actively managed AREIT fund, that investors are aware of the investment objective, management’s view on exposure to non-rental income and the investment strategy implementation. This is highly relevant given that not all AREITs are created equally.”

By Dugald Higgins, Head of Property & Listed Strategies

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