By Chris Owens, analyst, Atchison Consultants
Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 AREIT Index, returned 1.2% in the month ending 31 March 2022. AREITs underperformed the S&P/ASX 200 return of 5.2% over the month. Over the 12 months to March 2022, AREITs posted a strong total return of 17.7%, outperforming the S&P/ASX 200 return of 15.0%.
Sector Performance
Table 1 below shows the performance of AREITs for various periods ending 31 March 2022.
Over the 3 years and 5 years to the end of March, the sector produced total returns of 5.2% and 7.8% per annum respectively.
Sector returns were led by Industrial AREITs at 3.1%, followed by Diversified AREITs at 0.9%, Retail AREITs at 0.4% and Office AREITs with 0.0%.
Table 2 below shows the income performance of AREITs for various periods ending 31 March 2022.
The income component of the total return was 3.9% 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 6.0% at the end of the month, significantly higher than yields of both cash and Commonwealth Government bonds. However, the spread of the earnings yield over the 10-year government bond yield fell from 3.9% to 3.2% as bond yields rose substantially.
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
Retail AREITs such as Vicinity Centres and Scentre Group have shrugged off lockdowns by delivering strong financial results. Vicinity’s half year result to December 2021 showed net profit increased from -$394.1 million to $650.1 million, while Scentre Group showed a net profit increase from -$3,731.8 million to $887.9 million.
Vicinity admits that the overall number of visitors to its shopping centres has fallen compared on 2019 levels. However, the average visitor is spending 29% more. This has flowed into the collection of gross rental billings, which averaged 80% for the second half year to December 2021, an improvement over the previous period.
Scentre Group finished the 2021 year with 98.7% occupancy, up 20bps from the previous year. Despite shoppers in 2021 experiencing a greater lockdown period than in 2020, Retailer In-Store Sales marginally increased, up from $22.0 billion to $22.1 billion. These results show the resilience of shopping centre AREITs.
Australian inflation came in at 3.5% for the year to December but Scentre Group and Vicinity have both brushed off any inflation pressures. Vicinity and Scentre have stated that their rents are inflation-linked and therefore their gross profits are somewhat shielded from rising running costs.