A-REITs outflows surge as advisers favour private markets
Outflows have doubled in the property and infrastructure space to $1.3 billion with advisers instead favouring private markets as Morningstar data finds active property funds are struggling to outperform.
According to the latest Adviser Ratings Australian Financial Advice Landscape report, it found property and infrastructure funds saw an “intensification” of outflows with $1.3 billion in outflows reported in 2024 compared to $0.6 billion in the previous year.
This was particularly exhibited in A-REITs which are listed Australian real estate investment trusts which provide exposure to assets such as offices, shopping centres, and warehouses.
Affected funds included $694 million withdrawn from the Vanguard Australian Property Securities Index Fund, $365 million from the iShares Australian Listed Property Index Fund, and $335 million from the BT Property Securities Retail Fund.
“A-REITs continue to experience persistent structural outflows, with the largest redemptions coming from passive managers. This represents a significant shift as passive A-REIT managers have captured a substantial market share in recent years, making outperformance increasingly challenging for active managers.
“The current pattern, where passive strategies are losing assets most rapidly, suggests a fundamental reassessment of the sector rather than concerns about active management costs or capabilities.”
This was echoed by research from Morningstar which found active managers in this space struggled to outperform their peers. The A-REIT sector was facing pressure from high debt costs and falling asset valuations earlier in the year, particularly in office and retail, but had successfully rallied in the second quarter, thanks to falling bond yields, which improved sentiment towards property and increased transaction volumes.
“Due to the category benchmark’s concentration and narrowness, the manager cohort has historically found it difficult to outperform – a trend that has persisted over the past two years,” it said in a real asset update.
Instead, Adviser Ratings said advisers favoured global REITS over their Australian counterparts, and private credit funds over unlisted or direct property ones.
The research house said it believes this shift away is taking place due to overconcentration of the A-REIT sector with the top five stocks making up 70 per cent of the ASX 200 A-REIT Index as well as a failure by the Australian property sector to include broader assets, such as student housing and data warehouses.
With a limited exposure to private assets typically held in portfolios, Adviser Ratings also said the recent strong growth in private credit funds means many advisers are opting to allocate their private asset “quota” to these rather than unlisted or direct property, potentially driven by client demand. Others view global property or infrastructure ones as more attractive diversifiers for their clients.
A typical portfolio allocation to property and infrastructure would be 8 per cent.
“Most investors maintain limits on their overall exposure to unlisted or private assets. Historically, unlisted and direct property dominated this allocation, but the emergence of private credit and, to a lesser extent, private equity has created internal competition for this portfolio segment. Private credit, in particular, directly competes with unlisted and direct property’s income-generating appeal.”
Compared to A-REITs, private credit is the fastest-growing sector and stands at $38 billion compared to $9.7 billion in unlisted and direct property, experiencing net organic growth of 49.7 per cent during the year. The largest private credit fund at more than $3 billion in size is MCP Credit Diversified Australian Senior Loan from Metrics Credit Partners, an affiliate of Pinnacle Investment Management.
“Private credit’s appeal extends beyond just the ‘private assets’ theme, investors perceive its relatively high historical returns as offering a better risk-return trade-off than the potential returns available from unlisted property.
“Forward-thinking practices adapt their approach to incorporate these high-demand sectors while maintaining proper diversification.”
AUTHOR
Laura Dew
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