A-REITs match global competitors on annual returns as investor confidence in the sector improves: Ernst & Young

The performance of Australia’s listed property trusts sector (A-REITs) has stacked up well against global peers though domestic investors remain cautious, according to a new global report from Ernst & Young.

The report examined the global returns, performance and outlook of the six major REIT jurisdictions namely Australia, US, UK, Singapore, Japan and France.

Singapore came out on top, with its US$30 billion sector delivering investors a 21.8% average return, ahead of Japan (17.4%), with Australia ranking third alongside the substantially bigger US market, with an average return of 15.6%.

The UK REIT market ranked fifth with a return of 14.8%, and France came last with a return of 11.85%.

The report delivers an overall favourable impression of the A-REIT market and says most Australian listed property trusts are now in a stronger financial position; “however, memories of their steep losses during the global recession and financial crisis still linger”.

“A-REIT management teams are focused on strategies to enhance returns following a two-year period of strengthening balance sheets by restructuring debt and selling assets, especially assets held offshore,” says Ernst & Young Asia Pacific real estate leader Chris Lawton.

“Most Australian REITs are in a stronger financial position today but memories of their losses during the financial crisis still linger and some investors are putting money into unlisted property funds and direct investment that otherwise might have been invested in Australian REITs.

“Most REITs are focused on the Australian market and have gone back to basics by concentrating on clearly defined sectors of the market that complement their core competencies and generate reliable income streams, mainly from rentals,” Lawton says.

The report finds that A-REITs have yet to “win back the full trust of the investor community” and many of their shares continue to trade at discounts to net asset value (NAV) although recent months have seen that price gap continue to close.

“Some investors are putting money into unlisted property funds and direct investment that otherwise might have been invested in A-REITs.”

“Some offshore commentators believe that Australia’s property values are high relative to other global property markets and therefore contribute to the NAV gap.

“But perhaps the primary reason is that investor confidence in A-REITs has been slow to return, and A-REIT share prices slow to recover, after some A-REITs moved beyond the traditional passive income model to take on higher-risk investments, mainly in overseas properties.

“As long as A-REITs’ shares continue to trade at discounts to NAV, any property acquisitions they make will likely dilute their earnings.

According to Ernst & Young, the best-performing REITs globally are “better capitalised, have more financing options, own better-quality assets and have less risk exposure".