The Australian Real Estate Investment Trusts (AREITs) sector is set to be one of the most attractive growth asset classes over the next few years, according to Ibbotson Associates portfolio manager, equities and property, Bianca Rose.
AREITs disappointed investors during the global financial crisis (GFC), especially in 2008 when the S&P/ASX300 AREIT Accumulation Index produced an annual return of -55.30 per cent. Reasons for this included high gearing, unsustainably high dividends yields that in some cases were more than 100 per cent of earnings, and earnings from newer, less stable income sources, such as overseas property investments that were not well researched, Rose stated.
AREITs, however, no longer have the same risky characteristics as their managers have resolved the issues that plagued AREITs during the GFC, she said.
“We think the prospects for AREIT performance are excellent, and consider the sector likely to be one of the most attractive growth asset classes over the next five years on a risk-adjusted basis,” she said.
The average gearing level for AREITs has fallen from 40 per cent since the end of 2007, to a far more appropriate gearing level of 30 per cent, said Rose. Capital raisings also resulted in a significant reduction of overall debt exposure, she said, referring to JP Morgan research that showed that overall debt exposure dropped from $76.5 billion as at June 30, 2008, to $45 billion by September 30, 2010.
AREITs were also gradually shifting back to Australian property assets, she said. While debate continued around whether Australian residential property was currently overvalued, she noted that AREIT incomes were heavily exposed to the Australian commercial property market, and that the sector was therefore not troubled by vacancy issues.
The average dividend yield was likely to be around 6 per cent, said Rose.
“AREITs offer a competitive dividend yield and, more importantly, appear to have good capacity to meet dividend payments,” she said. “There’s also scope for future dividend increases, as well as share buybacks. This income return should underpin AREITs’ future returns.”
She noted that management teams had reduced average earning payout to more prudent levels of 80 per cent.
Rose said the performance of AREITs was being affected by poor sentiment rather than fundamentals, and the sector’s underperformance in 2010 compared to global REITs was a “classic contrarian play where the opportunity is good, but investors in general are uninterested”.
