Retail REITs retreat
Total returns in Australian real estate investment trusts fell by 6.3 per over the 2017 financial year, but are expected to rebound in 2018, according to the latest BDO A-REIT survey.
The 6.3 per cent negative total return is down significantly on the 24.6 per cent on the previous year.
BDO’s survey, now in its 23rd year, ranks the S&P/ASX 200 A-REIT Index trusts based on key financial and investment indicators in the 12 months to 30 June 2017.
“When it comes to the retail sector, the arrival of Amazon and the failure of some global brands in the Australian market – such as Top Shop and Gap – has certainly influenced market sentiment when it comes to the retail REITs and this has played out in the performance of their stock,” says Sebastian Stevens, BDO’s national leader of real estate and construction.
“However, with yields and underlying assets for the major retail A-REITs still performing strongly we think these entities will rebound in the 2018 financial year.”
BDO’s report finds that larger retail centre operators are likely to be “well insulated” against increased online competition, “especially as these centres become more diversified and offer services and retail experiences that won’t be easily replicated in the online marketplace”.
Further capital development, divestment of non-core assets and increasing diversification of tenant mix will increasingly be employed by retail A-REITs to combat the “Amazon threat”.
Stevens says that, overall, REITs remain a favourable asset class for investors.
“The REITS have managed their portfolio and products very well,” Stevens says.
“Low interest rates continue to be a key driver for the real estate sector, and with no indication that this will change in the near future, we expect investor demand for assets with relatively higher yields, whilst retaining secure income streams.
“Gearing is also down to its lowest level in a very long time.”
The ‘traditional’ commercial property trusts have come out on top this year, with REITs such as Charter Hall, Brookfield, Goodman, Arena and Cromwell all making up this year’s top 10.
Pubs and agriculture REITs are also well represented with ALE Property Group at number two on the index and Rural Funds Group in at number three.
Of the $3 billion spent by A-REITs on individual properties over the financial year, the largest transaction was Scentre Group’s $360 million purchase of David Jones flagship store in Sydney.
Read BDO’s A-REIT Survey 2017.