Overview

The ASX 200 AREIT Accumulation index rose by 11.04% over the year ending 30 June 2012.

The AREIT sector significantly outperformed Australian equities over the year. Having recapitalised their balance sheets since the GFC, most AREITs are now conservatively geared and provide a dividend yield of between 6-8% that has attracted investors seeking alternative investments to cash. Falling bond yields have also assisted valuations somewhat. Over the year a number of trusts undertook buybacks including Westfield, Dexus, Stockland and GPT which also supported share prices in the sector.

Outlook

Those AREITs with relatively stable rental income streams will continue to attract interest from investors in this low interest rate environment. An investor would prefer a yield of 6-8%, as against a cash rate of 3.5% or a 10 year government bond yield of 3.1%. Nevertheless, the prospects for the sector over the short to medium term remain somewhat muted for the following reasons:

  • The office sector relies heavily on financial services where activity remains subdued due to the poor state of financial markets. Additional supply coming on-line in cities including Sydney may put additional downward pressure on rents.
  • While the retail sector has held up well to date, lease renewals in coming quarters will inevitably result in lower rents given lacklustre retail sales exacerbated by the structural shift to on-line shopping.
  • The high value of the AUD coupled with slowing rates of growth with our key export markets is likely to suppress rental growth in the industrial sector, although supply constraints remain broadly supportive.
  • High levels of household debt will continue to limit trusts with residential development exposure. Lower interest rates together with developers focussing on delivering cheaper housing stock will provide some relief.

In conclusion, while yields and discounts to net asset values remain supportive of valuations, the macro environment remains unappealing. For these reasons we continue to recommend a mild underweight exposure to this asset class.

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