By guest contributor Atchison Consultants
Australian real estate investment trusts (AREITs) continue to provide attractive yields in this current low interest rate environment.
AREITs returned 0.6% over the month of March 2017, underperforming the broader Australian equities market, by 2.7%. The Retail AREIT sector (the largest constituent of the asset class) posted a negative return over the month, consequently dragging down the overall performance of the asset class. Poor performance of the Retail AREIT sector was attributable to subdued market sentiment and slowing retail sales amidst the possible entry of Amazon as a competitor.
Valuation multiples of the AREIT sector are currently higher relative to long term averages. As at 31 March 2017, the yield spread for the AREIT sector above the 10-year Government bond yield was 2.7% p.a. This is higher than the long term average spread (15 years to 31 March 2017) of 2.7% p.a. The yield spread has fallen by close to 50bps since November 2016 attributable partly to a rise of approximately 30bps in the 10-year Government bond yield and a lower AREIT earnings yield over the same period.
AREIT Earnings Yield vs 10 Year Government Bond Yield
Source: RBA, UBS