By Chris Owens, analyst, Atchison Consultants
Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 AREIT Index, returned -9.5% in the month ending 31 January 2022. AREITs outperformed the S&P/ASX 200 return of -6.4% over the month.
Over the 12 months to January 2022, AREITs posted a strong total return of 19.0%, outperforming the S&P/ASX 200 return of 9.4%.
Sector Performance
Table 1 below shows the performance of AREITs for various periods ending 31 January 2022.
Over the 3 years and 5 years to the end of January, the sector produced total returns of 7.0% and 8.2% per annum respectively.
Sector returns were led by Retail AREITs at -5.5%, followed by Office AREITs at -7.4%, Diversified AREITs at -10.1% and Industrial AREITs with -12.3%.
Table 2 below shows the income performance of AREITs for various periods ending 31 January 2022.
The income component of the total return was 3.8% for the 12-month period to January. Annual volatility of income returns was 2.0%, which is low when compared with other asset classes.
AREITs were trading at an earnings yield of approximately 6.1%, significantly higher than yields of both cash and Commonwealth Government bonds. The spread of the earnings yield over the 10-year government bond yield remained steady at 4.0%.
Changes over time of the spread between the earnings yield of AREITs and the 10-year government bond yield are shown in Chart 1.
Source: RBA, UBS (2021)
Market Review
Farmland values experienced a 13.6% growth over the 2021 calendar year on the back of high commodity prices, low interest rates and exceptional seasonal conditions. This is up from 8.7% in 2020. In December the Department of Agriculture’s Australia Bureau of Agricultural and Resource Economics and Sciences (ABARES) forecast the gross value of agricultural production to hit a record $78 billion this financial year. This has under stilled growing interest from investors.
The Rural Funds Group, the largest REIT in Australia, has continued to grow its portfolio of cattle and cropping properties in Queensland. Recently the fund purchased two properties, one near Rockhampton (2000ha for $13.8M) and the other near Emerald (4000ha for $32M).
Rural currently holds $1.3 billion in assets and recorded a net profit of $120.0M in the 2021 financial year, up from $48.9M in the previous financial year. The business is forecasting a 78% growth in revenue over the next financial year, as it begins to utilise surplus water entitlements to improve the productivity of its properties.
Rabobank, a rural lender is optimistic about the year ahead and is forecasting an 8% rise in the value agricultural land for 2022.