By Chris Owens, analyst, Atchison Consultants
Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 AREIT Index, returned 9.9% in the month ending 31 October 2022. AREITs outperformed the S&P/ASX 200 return by 3.9% over the month.
Over the 12 months to October 2022, AREITs posted a total return of -14.1%, underperforming the S&P/ASX 200 return of -2.0%.
Sector Performance
Table 1 below shows the performance of AREITs for various periods ending 31 October 2022.
Source: S&P/ASX 200 AREIT Accumulation Index (2022)
Over the 3 years and 5 years to the end of October, the sector produced total returns of 4.8% and 7.2% per annum respectively.
Sector returns were led by Retail AREITs which produced a return of 13.2%. Diversified AREITs were next with a return of 10.2%, while Industrial AREITs returned 8.2% and Office AREITs returned 0.9%.
Table 2 below shows the income performance of AREITs for various periods ending 31 October 2022.
Source: S&P/ASX 200 AREIT Accumulation Index (2022)
The income component of the total return was 3.9% for the 12-month period to October. Annual volatility of income returns was 1.6%, which is low when compared with other asset classes.
AREITs were trading at an earnings yield of approximately 7.1% 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 slipped to 3.3%.
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 (2022)
Market Review
The annual inflation rate hit a 30-year high of 7.3% for the year to September. Despite the impact this was thought to have on consumer spending, Scentre Group saw retail sales up 16% in its Westfield malls, exceeding the inflation rate and taking sales back above pre-pandemic levels.
Scentre’s Chief Financial Officer, Elliott Rusanow, expects individual visits to its malls to hit 500 milllion by the end of year and is forecasting a very strong fourth quarter across its Westfield malls. Scentre Group collected $1.9 billion in rent this year, an increase of over $200 million compared to last year. Scentre Group’s rents are linked to the CPI, giving them a good buffer against inflation, while at the same time putting pressure on tenants to maintain their sales growth to support their rents.
Scentre has reconfirmed its earnings guidance of a 14.2% increase in funds from operations to 19 cents per unit in 2022. Distributions for the year are expected to be 15 cents per unit, up 5.3%.