AREITs earnings yield update - October 2021

By Chris Owens, analyst, Atchison Consultants

Australian real estate investment trusts (AREITs), as represented by the S&P/ASX 200 AREIT Index, returned -0.4% in the month ending 31 October 2021. AREITs underperformed the S&P/ASX 200 return of -0.1% over the month.

Over the 12 months to October 2021, AREITs posted a strong total return of 30.2%, outperforming the S&P/ASX 200 return of 28.0%. Part of this return stems from “base effects” but the majority of it has arisen from distributions and price appreciation above February 2020 levels.
 

Sector Performance

Table 1 below shows the performance of AREITs for various periods ending 31 October 2021.

Over the 3 years and 5 years to the end of September, the sector produced total returns of 9.9% and 9.0% per annum respectively.

Sector returns in October were led by Retail AREITs at 1.6%, followed by Industrial AREITs at 0.8%, Office AREITs at 0.4% and Diversified AREITs with -0.7%.

Table 2 below shows the income performance of AREITs for various periods ending 31 October 2021.

The income component of the total return was 4.1% for the 12-month period to October 2021. Annual volatility of income returns was 3.2%, which is low when compared with other asset classes.

AREITs were trading at an earnings yield of approximately 6.1%, significantly higher than yields of both cash and Commonwealth Government bonds. The spread of the earnings yield over the 10-year government bond yield fell marginally to 4.0% as bond yields rose.

Changes over time of the spread between the earnings yield of AREITs and the 10-year government bond yield are shown in Chart 1.

Market Review

The alternative real estate sector is underrepresented in the Australian listed property sector. Currently, alternatives make up just 10% of AREITs while making up close to 60% of listed real estate in the US. The sector comprises assets such as childcare, data storage centres, health care and petrol stations. Growth and performance in these sectors has been high when compared to the traditional listed trust which hold office buildings and shopping malls.

Buoyed by positive returns during the pandemic, the alternative property sector is likely to become more attractive to both institutional and mum and dad investors. Healthcare and childcare property for example, offer very stable tenant bases with weighted average lease expiries (WALE) of 10 – 15 years. This is significantly more than the 3 – 5 year WALE offered by retail and office property trusts. Alternative real estate also offers higher capitalisation rates of 6.1% on average, compared to 5.1% from office and retail property.

In the year to September 2020, retail property delivered an annual return of -10.1% while the return on office property for the same period fell to 4.7%. Alternative property assets, however, saw continued growth. Healthcare property posted a return of 11.2%, while industrial property returned 11.5%. Growth in the alternative real estate space is likely to continue as demand for these essential services continues.


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