Focus on income
Attractive yields, with the potential for capital growth, are a strong attraction of real estate trusts
Q What exactly is an A-REIT? An A-REIT is an Australian real estate investment trust, which is an entity that owns, operates or finances income-producing real estate. Essentially, A-REITs provide an opportunity to invest in a number of properties that would otherwise be out of reach of individual investors, such as large commercial properties. The properties are managed by a fund manager, and investors receive the benefit of rental income from the properties (less expenses), as well as the potential for capital growth. One of the key benefits of the ASX-listed A-REITs is that investors are able to access these returns and enter or exit their investments without the need for the fund manager to buy or sell the underlying properties. SELWYN CHONG
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What are the different types? A-REITs may focus on one sector, such as office, industrial, retail, hotel, healthcare or residential properties. Some A-REITs are diversified across a number of sectors and also undertake property development activities, which offer a higher return and risk. In addition, some A-REITs also earn income as a fund manager – their earnings are based on a fee derived from managing the property only.
SELWYN CHONG
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What are the advantages of investing in A-REITs? A-REITs allow an individual investor to own a share in a commercial property portfolio, such as retail centres, offices or industrial assets, which may otherwise be out of reach. Such an exposure can offer a good degree of diversification through property and away from the traditional asset classes of ordinary shares or bonds. For income-seeking investors, A-REIT exposure can provide a defensive income stream, normally at a relatively attractive yield, with the potential for capital growth over time. In contrast to direct property ownership or exposure, which can be highly illiquid, A-REITs offer a more liquid investment option.
TOBY GREENE Q What are the risks in an A-REIT investment? Investors should be aware of several risks relating to A-REITs. The value of the underlying unit is exposed to the value of the commercial property, so a decline in property value will result in capital depreciation of one’s investment. A-REITs have higher leverage or gearing than normal equities, so there is some debt and interest rate risk. Furthermore, given the income distributing nature of A-REITs, they can often be viewed as somewhat of a “bond proxy”, meaning that the expected yield demanded is at a particular premium to treasury yields. Therefore, a rise in the yield curve or cash rate may result in a capital depreciation of one’s investment. Furthermore, as some A-REITs have a stapled security structure, there may be some development or funds management risk, as opposed to a traditional A-REIT with mostly income-producing assets. Listed A-REITs have more volatility than unlisted assets.
TOBY GREENE
Investors can get exposure to retail centres, offices or industrial assets, which otherwise may be out of reach
Q How do I choose an A-REIT?
When considering an investment, it’s usually a decision around one of three main categories: commercial (eg, warehouses), retail (shopping centres) and office (office towers). There are other specialised asset classes, such hotels or retirement villages. However, there is very little by way of residential property included in an A-REIT structure. The question comes down to how much exposure it is timely to have to these asset classes.
ANDREW CAMPION
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What factors influence the price of A-REITs?
The key drivers for prices are:
The outlook for the economy.
The outlook for commercial rents. The outlook for new supply.
The state of play for bond yields. Rising yields can hurt A-REITs, falling bond yields can assist them.
The relative price verses the net tangible asset backing.
The amount of gearing on the balance sheet.
Any regulatory issues for the sector. Of course, there are individual sector influences. For example, retail- and residentialorientated A-REITs have underperformed over the past 12 months because of negative expectations of retail sales and the downturn in the housing market. However, office and industrial A-REITs have outperformed due in part to a shortage of prime office and industrial real estate, which has been pushing up rents and lowering acquisition yields.
LOUIS CHRISTOPHER
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How do I invest in A-REITs?
Before making any investment it’s important to make sure it’s right for you and your portfolio. Then it’s as straightforward as contacting your full-service ASX broker, though you may want to seek their advice beforehand, or going online to place your order there.
ANDREW CAMPION
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Do they pay high distributions and how are they taxed?
A-REITs generally operate under a trust structure, whereby if they pay out more than 90% of their earnings then they are not subject to corporate tax. There are some exceptions where trading profits may be taxed but overall this means that distributions from A-REITs should be higher as tax has not been deducted.
Current yields on the ASX-listed A-REITs are generally in the 5%-7.5% range, with a couple of the stronger operators delivering yields under 5% as a result of strong price gains. Because A-REITs are generally untaxed, investors get a higher return with little or no franking credits, so investors need to take this into account in their deliberations. In some cases they also pay their distributions via a capital return, which may provide deferred tax benefits to certain investors.
SELWYN CHONG
Q How have A-REITs performed historically?
Performance over the past 12 months has been offering about 17% returns, which has been in line with the greater market. Since 2011, A-REITs have generally underperformed when the market is rising and outperformed on market corrections. This is due to the relatively low gearing in the sector. The chart shows 12-month rolling returns of the S&P/ASX 300 A-REIT Index verses the S&P/ASX 300 Index. LOUIS CHRISTOPHER
Q What is the outlook for the next 12 months?
Our expectation is that A-REITs will be a good defensive play over the next year. However, it would be wise to make a diversified investment and not put all your funds into one trust.
LOUIS CHRISTOPHER
Visit moneymag.com.au/areitquestions for answers to more questions, including what “stapled securities” A-REITs are and whether other countries have REITs and how you can invest in them.