AREIT sector strong but holds structural risks

The Australian Real Estate Investment Trusts (AREITs) sector has performed well for the year to 30 June 2014 with an average return of 12.7 per cent but still contains significant concentration risk across a range of funds according to research house Lonsec.

In its annual AREIT sector review Lonsec stated that while the performance of AREITs over the last 12 months was strong there would be shrinkage in the sector as a result of corporate activity alongside the already high level of concentration risk evident in all 23 funds surveyed in the review.

Lonsec stated that each of the funds surveyed had a high exposure to a small number of securities with the 10 largest stocks accounting for nearly 90 per cent of the capitalisation of the S&P/ASX 200 AREIT Accumulation Index, a position which had been static for the past year.

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The sector review, principally authored by Lonsec senior investment analyst Peter Green, stated the sector was likely to continue to shrink if Westfield Corporation relocated to the USA and that fund managers would continue to struggle to generate alpha as they increased in size within the local market.

Green stated in the review that financial planners should regard AREITs as listed securities with returns that are subject to normal equity market risks while also remembering that some managers and funds have exposures to cyclical earnings streams from property development and asset management.

"In short, concentration risk is not the only issue that investors need to consider when investing in the AREIT sector. Nevertheless, the changes to capital structures that were undertaken by corporate managements following the global financial crisis laid the foundations for the strong absolute returns that have been achieved in recent years," Green said.

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