By guest contributor Jeremy Jiang, Property Analyst, Atchison Consultants
Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 REITs Index, returned 1.2% in August, outperforming the S&P/ASX 200’s return of -2.4 % over the month.
Over the 12 months to August 2019, AREITs posted an impressive total return of 19.4% (10.4% higher than the S&P/ASX 200 return of 9.0%). One of the forces responsible for this return was a fall in market interest rates. The Reserve Bank of Australia (RBA) has already cut the cash rate to a new record low 1.00%, which is in line with the global trend. Bond yields across the globe continued to decline as investors position themselves for a slow growth environment. The Australian 10-year government bond yield fell 32bps from 1.21% to 0.89% over the month. Compared to the same time in 2018, the Australian 10-year government bond yield has fallen by 179bps.
There are ongoing uncertainties in the world’s economic environment. China announced a new import tariff on US$75 billion worth US goods as a retaliation to US President Trump’s statement, ‘American companies are ordered to look for an alternative to China’. The UK government has suspended its parliament just days after MPs return to work, and a matter of weeks before the 31th October Brexit deadline, raising odds of a no-deal outcome. The 2019 Hong Kong anti-extradition bill protests have driven Hong Kong’s stock market to its lowest value this year and pressured its currency. Hong Kong’s Hang Seng Index fell 7.4% in August on the back of political unrest, triggering fears over capital outflows.
Market volatility was high due to multiple uncertainties in global markets. Global markets slumped in August which benefited the AREITs market to some extent; AREIT securities demonstrate relatively defensive features when backed by predictable and stable income streams.
At the end of August, AREITs were trading on a 51.7% premium to net tangible assets (NTA) on an index-weighted basis. This measure implies the sector is expensive, with a limited upside in asset valuations remaining in this cycle. However, AREITs’ earnings yields continued to be attractive relative to interest rates.
Sector Performance
Table 1 below shows the performance of AREITs for various periods ending 31 August 2019.
Table 1 – S&P/ASX 200 AREIT Accumulation Index Performance: Total Returns (31 August 2019)
