AREITs benefitting from falling debt, share buy back schemes: Zurich Australia fund manager

Falling debt costs and share buy backs have supported the valuations of Australian Real Estate Investment Trusts, a top performing fund manager in the sector has said.

Smaller AREITs with exposure to residential property have also performed well over the past year, Zurich Australia senior investment specialist Patrick Noble told Property Observer.

“We still see the recovery on the east coast is supporting those with residential exposure or exposure to economic activity in this part of the world,” Noble said.

Listed residential developers Villa World and Peet were strong performers in the portfolio of the Zurich Renaissance Australian Property Securities fund, which is managed by Renaissance Property Securities. Villa World gained around 70% in the 12 months to the start of June, while Peet added 9.5% over that timeframe.

Retirement village owner/operator Ingenia Communities had also done well for the portfolio, gaining more than 160% over the past two years. Noble said the manager had started to sell its holdings in that stock to take profits.

The Zurich Renaissance fund made no gains through May, but was the top performer in its sector over three and five years, returning 15.9% and 18.6% respectively over those timeframes, according to Morningstar data.

Over three years, the S&P/ASX 200 AREIT index rose 13.8% and the average fund manager gained 14.2%, Morningstar’s latest monthly sector survey showed. Over five years, the index returned 14.6% and the average fund manager returned 15.4%.

Noble said the managers at Renaissance pursued an active value style of investing, meaning they researched individual AREITs and invested in those they believed to be undervalued by the market. It aimed to outperform the benchmark by 1.5% a year over three year rolling periods.

The manager had a preference at present for AREITs like Charter Hall Group, which earned income from development and funds management.

“When markets improve they get more fee income which boosts earnings. In this market, their income is growing,” Noble said.

It was avoiding those with exposure to the office and retail markets.

The office market was challenged by strong competition for lease renewals and extra supply of office buildings that were under development.

High rent costs and low income growth made the retail sector less attractive than other parts of the market, Noble said.