By Chris Owens, analyst, Atchison Consultants
Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 AREIT Index, returned 12.1% in the month ending 31 July 2022. AREITs outperformed the S&P/ASX 200 return of 5.8% over the month.
Over the 12 months to July 2022, AREITs posted a total return of -1.9%, marginally outperforming the S&P/ASX 200 return of -2.2%.
Sector Performance
Table 1 below shows the performance of AREITs for various periods ending 31 July 2022.
Over the 3 years and 5 years to the end of July, the sector produced total returns of 0.2% and 6.8% per annum respectively.
Sector returns were led by Industrial returning 15.9%, Retail returning 11.6%, with Diversified returning 9.6% and Office returning 7.6%.
The income component of the total return was 3.8% for the 12-month period to June. Annual volatility of income returns was 1.7%, which is low when compared with other asset classes.
AREITs were trading at an earnings yield of approximately 6.2% at the end of the month, higher than yields of both cash and Commonwealth Government bonds. However, the spread of the earnings yield over the 10-year government bond yield shrunk from 3.6% to 2.8% as earning yields rose.
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
Despite the impact of rising rates, there was much to celebrate with the release of the annual results from Dexus, Scentre and Vicinity. The past two years of the pandemic has seen these three AREITs struggle with “work from home” policies and government-enforced lockdowns.
Dexus, a dominant player in the office market, saw net profit increase by 42%, from $1.1 billion in 2021 to $1.6 billion in 2022. Dexus says part of its good result comes from hedging against higher interest rates. Currently, 65% of its debt is hedged, with this number expected to rise to up to 80% in the 2023 financial year.
Vicinity Centres, a major owner of Chadstone Shopping Mall, saw net profit rise from -$258 million in 2021 to $1.2 billion in 2022. Leasing spreads, a metric for showing the difference between older rental agreements and new rental agreements, showed an improvement from -12.7% to 4.8%. Vicinity says that foot traffic is still only at 75% of pre-COVID levels. However, the amount spent by each consumer has increased by 30% over pre-COVID levels.
Scentre, operator of Westfield shopping malls, has beaten expectations, with net profit increasing from $463 million in 2021 to $548 million in 2022. Like Vicinity, Scentre saw a turnaround in leasing spreads from -8.7% to -3.9%. Rental collections also turned heads, increasing from $192 million to $1.3 billion in 2022.
So far, these three AREITs have continued their recovery despite concerns of increasing inflation and increased borrowing costs.