Waning A-REIT sentiment prompts boom in fund closures

Over half of Australian funds have merged or closed in the last 15 years, according to S&P, with Australian equity A-REITs faring the worst. 

The latest SPIVA Australia Mid-Year 2025 Scorecard found 52 per cent of funds that were available 15 years ago have since closed. The asset class with the best survivorship was Australian equity small and mid-cap (SMID) funds, where 55 per cent of the 119 funds in 2005 are still available, while the worst was A-REITs, where only 41 per cent of funds in 2005 are available.

Reasons for a fund closure or merger can include insufficient funds under management, underperformance, a high-profile manager exit, or consolidation of funds, such as via a company merger. 

Recent fund closures in Australia include Neuberger Berman Global Sustainable Equity, BlackRock Global Impact, JPMorgan Sustainable Infrastructure Fund, and Pendal Enhanced Credit fund. 

Chris Gosselin, CEO of Fund Monitors, said: “Unless a fund can attract sufficient investors and funds under management then the fund is unsustainable over time. Funds are constantly closing and there’s always a new manager from an existing organisation wanting to go out on their own. 

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“The reason for lack of FUM can be as simple as poor marketing and distribution, lack of research coverage, poor performance and, less frequently, fraud or outright failure.”

Why are A-REITs struggling?

The exit of such a high volume of A-REITs, however, poses broader questions about the sector, as SPIVA found this sector has seen the highest proportion of closures over three, five, 10, and 15 years.

A-REITs – Australian real estate investment trusts – are listed vehicles that provide exposure to large-scale commercial property assets such as offices, shopping centres, and warehouses. They are favoured for their ability to provide a sustainable income stream with monthly or quarterly distributions from the regular rental income. 

However, they have lost favour more recently as advisers favour moves towards alternatives and private markets rather than real estate or towards global versions (G-REITs) which offer greater diversification, both of geographies and sectors.

Money Management previously covered data from Adviser Ratings that found $694 million had been withdrawn from the Vanguard Australian Property Securities Index Fund, $365 million from the iShares Australian Listed Property Index Fund, and $335 million from the BT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. 

Dugald Higgins, head of responsible investment and real assets at Zenith Investment Partners, said: “A-REITs have clearly been out of favour with many advisers, posting negative growth rates each year. There are likely multiple drivers. Part is market headwinds. Rising interest rates in 2022–2023 hurt valuations, and structural challenges such as appetite for office demand post-COVID added uncertainty. 

“Part is structural, increasing predominance of money moving to passive strategies in A-REITs means that when market headwinds arrive, more money tends to move out due to sector rotation taking place.”

Regarding closures because of underperformance, Higgins said the ASX 300 A-REIT Index was hugely concentrated, with 10 stocks making up more than 85 per cent of the market.

“You can get one call wrong and dynamite your performance,” he cautioned. “It doesn’t mean managers can’t outperform, far from it, but it’s challenging and no active strategy will outperform all the time.”

Gosselin agreed that sentiment was poor towards A-REIT funds from advisers, and they formed a different portion of an asset allocation portfolio compared to more traditional bonds or equities.

“REITS are a specialised area, heavily influenced by the economy, interest rates and the property market. One shouldn’t put them in the same asset allocation basket as equities or bonds although there are more similarities with fixed income from a risk/return perspective,” he said.

“The reality is that while long term returns are similar, the sector is highly cyclical and risk adjusted returns are lower relative to general equities, creating challenges for portfolio construction," added Higgins. 

Commenting on he had observed advisers rotating away from A-REIT towards private markets funds, Higgins warned this may indeed be the case, but investors “forget the repeated lessons of the past”. If the tide turns against private markets funds, in the way it has towards A-REITs, this could present problems given the illiquidity of the assets held.

“Money is undoubtedly pouring into private markets across credit, equity and to a lesser extent, infrastructure. However, we think it is relevant to point to the experience of local private real estate funds. At the bottom of the interest rate cycle, money was flooding these strategies in the wealth market but now, virtually all evergreen funds in this segment are either not currently open for redemptions, or are limiting them,” Higgins said.

“This is less about the funds and more about sector rotation out of real estate.”