REIT sector hit by higher bond yields
The Australian real estate investment trust (AREIT) sector underperformed its global peers during the first quarter of the year, according to Principal Global Investors.
The firm’s Q1 Global Real Estate Securities update found Australia was the second worst performing region after North America, coming in at -6.2 per cent compared with -7.3 per cent for the US as the quarter saw negative returns across all regions, with the exception of Japan and emerging markets which delivered single-digit positive returns.
However, Principal’s real estate portfolio manager, Janine Young said the sector was able to recoup some of its losses when escalating trade tensions drove investors into a risk-off mindset.
According to Young, large cap AREITs underperformed their smaller counterparts, which was attributable to fund flows out of the sector.
“Bond yields affect how REITs trade. What we saw here at home was a reaction to concerns about yields moving higher, which led to a general rotation out of yield-sensitive sectors, like AREITs,” she said.
“As bond yields rise, money moves out of the sector into other, less rate-sensitive sectors and larger, more liquid AREITs tend to be disproportionately affected, because they are generally more well held and easier to trade in and out of compared to smaller, less liquid AREITs.”
However, Young explained that despite investor worries about rising bond yields, 10-year Australian Government bond yields actually ended the quarter lower, rather than higher, masking some sharp movements.
Following this, yields were up 25 basis points to 2.9 per cent in February, but eventually ended the quarter down at 2.6 per cent.
Young also stressed that net tangible assets were up by a healthy 6 per cent on average because of rental income growth and supportive cap rates.
The overall earnings outlook for AREITs was generally positive, despite some softening in operational conditions in the first half of the 2018 financial year, she said.
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