By Chris Owens, analyst, Atchison Consultants
Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 AREIT Index, returned -6.8% in the month ending 31 March 2023. AREITs underperformed the S&P/ASX 200 return of -0.2% over the month.
Over the 12 months to March 2023, AREITs posted a total return of -13.9%, underperforming the S&P/ASX 200 return of +0.1%.
Sector Performance
Table 1 below shows the performance of AREITs for various periods ending 31 March 2023.
Over the 3 years and 5 years to the end of March, the sector produced total returns of 13.6% and 4.8% per annum respectively.
The Industrial segment was the best performer after it returned -5.5%. Retail AREITs returned -6.8%, Diversified AREITs returned -7.4% and Office AREITs returned -11.2%.
Table 2 below shows the income performance of AREITs for various periods ending 31 March 2023.
Table 2 – S&P/ASX 200 AREIT Accumulation Index Performance: Income Returns (31 March 2023)
The income component of the total return was 4.4% for the 12-month period to March. Annual volatility of income returns was 1.8%, which is low when compared with other asset classes.
AREITs were trading at an earnings yield of approximately 7.0% at the end of the month, higher than yields of both cash and Commonwealth Government bonds. The spread of the earnings yield over the 10-year government bond yield rose from 3.4% in February to 3.8%.
Changes over time of the spread between the earnings yield of AREITs and the 10-year government bond yield are shown in Chart 1.
Market Review
While office tower owners face asset value write-downs of up to 20% amid high vacancy rates and rising debt costs, the healthcare property sector presents a promising outlook for investors. Private hospitals, in particular, are expected to perform well regardless of market conditions due to Australia’s growing and ageing population, increasing hospital visits among older patients, and rising demand for private health insurance.
The healthcare property sector has attracted strong investor interest. HMC Capital’s recent acquisition of eleven hospitals will create the country’s largest diversified healthcare REIT. The deal, worth $1.5 billion, was struck on a net yield of 5.8% and is expected to deliver an annual total return of more than 9%.
According to JLL, the total value of the private hospital real estate sector is projected to reach $41 billion by 2041, representing a rise of 63% in less than 20 years. This growth will be driven by investment in new facilities to cater to the medical needs of an ageing population and a rise in the take-up of private health insurance by younger Australians.
Healthcare property is a unique asset class with a promising future, distinct from other sectors such as malls or office spaces. The sector’s structural tailwinds and growing demand for private hospital services make it an attractive investment opportunity for institutional and retail investors alike.