AREITs Earnings Yield Update – June 2017

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31 July 2017

Australian real estate investment trusts (AREITs) still presents well on yield relative to cash and other yielding asset classes and sectors. AREITs are expected to continue providing attractive relative yields in the current investment environment

AREITs returned -4.8% over the month of June 2017, underperforming the broader Australian equities market, by 5.0%. Over the year to 30 June 2017, AREITs returned 6.3%, underperforming the broader Australian equities market by 20.3%.

The Retail sector makes up the largest component within the sector and as a result heavily impacted sector performance. Continuing fear surrounding the retail sector amidst patchy retail spending and expected competition from Amazon’s impending entry into Australia and online retailing more broadly weighed down the AREIT sector during the month. Hawkish comments from central bankers didn’t help the overall sector either.

However, notwithstanding the concern with the retail sector, it’s performance (-4.6%) still meant it outperformed the Office (-5.3%) and Industrial (-5.9%) sectors over the month.

Over the month of June, the best performing stock within the Retail sector was BWP Trust (+0.9%) and the largest underperformer was Westfield Corporation (-5.3%). Within the Office sector, Cromwell Property Group (+1.6%) was the best performer whilst Dexus Group was the largest underperformer (-10.0%) mainly attributable to unfavourable pricing in its latest capital raising. Goodman Group, the only industrial REIT within the AREIT sector, returned -5.9% over the month.

Valuation multiples of the AREIT sector are currently higher relative to long term averages. As at 30 June 2017, the yield spread for the AREIT sector above the 10-year Government bond yield was 3.2% p.a. compared with the long term (15 year) average of 2.7% p.a.

The yield spread fell over the month, attributable partly to an increase of 15bps in the 10-year Government bond yield, as well as a small (10 bps) increase in forecast earnings yield over the month for the sector.

Source: RBA, UBS

Forecast Earnings Yields

Sectors12 month yields (%p.a.)
Retails5.5
Office6.0
Industrial5.4
Diversified6.1

Source: UBS

Not much has changed from last month in terms of the short-term yield outlook for the sector. The current earnings yield for AREITs remain attractive relative to other yielding asset classes. The earnings outlook for AREITs over the next twelve months remains positive but is expected to be lower to previous years’ highs.

Forecast short term yield expectations for the Retail sector increased during the month of June. This was mainly attributable to the market pricing in better Retail sector business conditions, with recent sales numbers above expectations. Of particular note is the positive growth expectations in parts of the discretionary sector (apparel and household goods). Yield expectations for the Office, Industrial and Diversified sectors did not change materially.

A recovery in short to medium term bond yields is anticipated amidst stronger economic conditions and will consequently impact the earnings yield potential from the AREIT sector over the medium term.

Despite recent positives from the Retail sector, the imminent introduction of Amazon is likely to impact returns over the medium term.

Being an interest rate sensitive sector, movements in the interest rates and bond yields in the short to medium term, will remain a big driver of return expectations.