Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 REITs Index, returned -2.7% in August, underperforming the S&P/ASX 200’s return of 1.8 % over the month.
Over the 12 months to September 2019, AREITs posted an impressive total return of 18.3% (5.8% higher than the S&P/ASX 200 return of 12.5%). One of the forces responsible for this return was a fall in market interest rates. The Reserve Bank of Australia (RBA) has already cut the cash rate to a new record low 0.75%, in line with the global trend. Bond yields across the globe declined as investors position themselves for a slow growth environment. Even though the Australian 10-year government bond yield increased 12bps from 0.89% to 1.01% during September, compared to the same time in 2018, the Australian 10-year government bond yield was 168bps lower.
Equity market volatility remained high as multiple uncertainties remained in global markets, although some progress was made. While global share markets rallied in September, AREIT securities underperformed as their defensive features made them relatively less attractive compared to growth assets.
At the end of September, AREITs were trading on a 46.8% premium to net tangible assets (NTA) on an index-weighted basis. This measure implies the sector is expensive, with a limited upside in asset valuations remaining in this cycle. However, AREITs’ earnings yields continued to be attractive relative to various interest rates.
Sector Performance
Table 1 below shows the performance of AREITs for various periods ending 30 September 2019.
Table 1 – S&P/ASX 200 AREIT Accumulation Index Performance: Total Returns (30 September 2019)