Are AREITs still defensive?
Right from the start over 50 years ago, Australian real estate investment trusts (AREITs), then known as listed property trusts (LPTs), were tailored to risk averse investors. Often approaching or in retirement, they needed a regular, reliable income stream and AREITs suited them perfectly.
Aside from the global financial crisis (GFC), when the sector embarked on a foolhardy and expensive offshore acquisition binge, AREITs have delivered on their promise.
In the aftermath of the GFC, AREIT managers cleaned up their act, making the sector more resilient through lower debt levels, increased sources of financing and less speculative activity. AREITs got back to their knitting.
Then came the pandemic. No matter how bad the scenarios investors might have planned for, deserted office towers and shopping centres probably didn’t number among them. And yet here we are. Half the country is back in lockdown and shopping centres and office blocks are empty once again.
With the pandemic accelerating the shift to online retail and the trend to work-from-home, income investors were already concerned that AREITs might not be the reliable investments they once were. Thanks to delta, many are now asking whether AREITs are defensive at all.
It’s a fair question. Yet backed by my team’s knowledge and experience, plus the data we’ve collected over the past year or so, I can answer it with an unequivocal ‘yes’.
The first point is that whilst delta might be a ‘game changer’ when compared to the initial outbreaks, vaccines mean we can deal with it. And if not, we have a proven capacity to develop new vaccines that will probably address whatever nature can throw at us. Europe and North America, where things are returning to normal even with high daily caseloads, point the way.
As our politicians keep reminding us, we are going to have to learn to live with the virus. Tourists in Europe are now transiting airports; crowds at football stadia are back and in full voice; and people are out and about, living with the virus. In a few months, Australia should be in a similar position.
I recommend investors look beyond the recent scary headlines and the lockdown blues and focus on where we will be this time next year, and beyond. That’s what long term investing is all about.
The second point concerns the ability of AREITs to sustain themselves until we get there. The Government’s National Code of Conduct is back in play but landlords have enough capital to get them through should tenants be eligible for rental support. Most of the income streams on which AREIT investors rely are not at risk.
The current situation is unlikely to be as demanding as it was in 2020. Even if it is, the data over this period is reassuring. There was a strong recovery in operational performance of sectors most impacted by the pandemic, especially large mall retail. We’ve also seen good growth in asset values across most asset types, a reflection of investor demand and the belief in a sustained economic recovery.
While lockdowns have re-introduced uncertainty and the unequal burden of the leasing code, AREIT management teams and investors are looking at life after lockdown. If the next few months are tough, it will only be temporary with encouraging signs around vaccination rates a boost to consumer and business sentiment.
The lease contract delivers a level of protection to income investors, which ordinary listed shares don’t offer. This is the key differentiator for the AREIT sector and what will sustain it into the future.
Surviving a global financial crisis and a pandemic are the ultimate stress tests. AREITs, despite a few bumps along the way, have come out the other side.
This brings me to my third point. Whilst question marks hung over the sector in the first 12 months of the pandemic, they have now mostly been answered.
A year ago, APN’s AREIT Fund offered a running yield of 6.29%1. This was the numerical expression of the fear and uncertainty that enveloped the sector. The yield has now fallen, albeit to a still attractive 5.21%2, further emphasising investors are seeing beyond the pandemic.
The numbers bear this out elsewhere, too. As noted in AREITs – the come-back kids, in financial year 2021 the ASX300 equities index rose 28.5% while the ASX300 AREIT index posted a staggering gain of 33.2%. It has continued to rise since. There is a lot more confidence in the sector than a year ago.
Investors generally don’t cope well with risk and uncertainty. Yet that is all they have seen in the last 18 months. While AREIT prices have been a rollercoaster, operationally they have shown a level of resilience far beyond what doomsayers expected.
APN saw this period as an opportunity to tweak the AREIT Fund portfolio, snapping up some bargains, reducing our exposure to discretionary retail, increasing our industrial/logistics weighting while continuing to focus on generating income from high-quality, well-managed properties with top-notch tenants. We have a portfolio built to deal with the short-term noise of the delta variant.
*Pete Morrissey is Head of Real Estate Securities at APN Property Group.This article has been prepared by APN Funds Management for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for APN's monthly newsletter Review.