By guest contributor Atchison Consultants
Australian real estate investment trusts (AREITs) continue to provide attractive relative yields in the current low interest rate environment. AREITs returned 2.6% over the month of April 2017, outperforming the broader Australian equities market, by 1.6%. Outperformance over the month was mainly attributable to a ‘flight to safety’ approach by investors amidst geopolitical risks and uncertainties.
The Retail AREIT sector (the largest constituent of the asset class) posted a lower positive return over the month relative to Office and Industrial AREIT Sectors. Relatively weaker performance of the Retail AREIT sector over the last few months was attributable to subdued market sentiment and slowing sales amidst increased competition from online retailers.
Valuation multiples of the AREIT sector are currently higher relative to long term averages. As at 30 April 2017, the yield spread for the AREIT sector above the 10-year Government bond yield was 3.3% p.a. This is higher than the long term (15 year) average spread of 2.7% p.a.
The yield spread increased by 40bps in April 2017 attributable partly to a fall of 20bps in the 10-year Government bond yield and an increase in forecast earnings yield over the same month. The fall in the 10-year Government bond yield is a result of a higher bond price amidst increasing demand for treasury notes as investors sought refuge from recent geopolitical risks and uncertainties.
