Domestic investors are still wary of Australian-listed property. Despite the sector gaining more than 20 per cent over the past year, making it the best-performing sector of the Australian sharemarket, domestic investors are not buying into the recovery. Many are still haunted by memories of the sector's spectacular blow-up during the depths of the global financial crisis.
During 2008, the S&P/ASX200 A-REITs (Australian real estate investment trusts) index fell 54 per cent compared with a fall by the wider sharemarket of 38 per cent. The reason for the bigger hit to listed property was that many trusts had high gearing levels and complex corporate structures. During the 10 years prior to the crisis, many trusts changed from collecting rents from the buildings they owned into riskier activities such as property development. Those running the trusts were urged by market analysts to re-engineer their "lazy" balance sheets. They borrowed against their properties to acquire more properties and expanded into overseas real estate markets. The trusts' debt-fuelled growth resulted in a few years of spectacular returns. Many of their small investors had invested in the trusts prior to this because they were conservative investments providing stable income.
In a recent report on the sector, researcher Morningstar shows the trusts' income has remained fairly stable. After producing income of 3.41 per cent in 2008, they have produced income of about 8 per cent in 2009 and about 6 per cent for each of 2010 and 2011. With the cash rate cut last week to 3.25 per cent and more to come, the income from the trusts is attractive.
But the flip side is that while the trusts have reduced their borrowings and re-focused their businesses towards rent collecting, their correlation with the broader sharemarket remains high. Investors are still likely worried that their share prices will again be hit by any setback on the wider sharemarket.
Another factor is that it is foreign investors who have been investing in the trusts rather than Australian investors. Despite the strong Australian dollar, which makes the trusts more expensive for foreign investors to buy, overseas super funds have been favouring good-quality Australian property given the ongoing instability in Europe and the US.
The risk for local investors is that this interest could be fickle, and a change in currency exchange rates and other factors could prompt the super funds to sell. Morningstar says, however, that the income-return potential should remain strong even if the capital gains of the past year go into reverse.
As for the property securities funds - the managed funds that invest in the trusts - Morningstar says the listed property sector is dominated by a few large trusts, making it difficult for fund managers to outperform the index.
Morningstar says many funds are showing returns similar to the index once fees are deducted. Only one fund has been awarded Morningstar's highest gold rating, the Vanguard Property Securities Index Fund, which mirrors the returns of the index and has low fees.
Frequently Asked Questions about this Article…
Why are many domestic investors still wary of Australian-listed property (A-REITs)?
Many domestic investors remember the 2008 blow-up when the S&P/ASX200 A-REITs index fell about 54% — worse than the broader market — because many trusts had high gearing, complex structures and moved into riskier activities like property development. Those memories make local investors cautious about jumping back into listed property.
Has the Australian-listed property sector recovered recently and is it a good time to invest?
The sector has recovered strongly — gaining more than 20% over the past year and ranking as the best-performing sector on the Australian sharemarket — but many domestic investors remain cautious. The recovery has been supported by capital gains, yet concerns over market correlation and past leverage still influence buying decisions.
Are property trusts still producing attractive income or yields for investors?
Morningstar data in the article shows listed property trusts produced 3.41% income in 2008, about 8% in 2009 and roughly 6% in both 2010 and 2011. With the cash rate cut to 3.25% (as noted in the article), income from the trusts looks attractive for income-seeking investors.
Have property trusts reduced their borrowing and risk since the global financial crisis?
Yes. According to the article, many trusts have reduced their borrowings and refocused their businesses on collecting rents rather than pursuing highly leveraged, development-led growth, which has helped stabilise income profiles.
How closely are A-REITs correlated with the broader sharemarket?
The article notes that despite de-leveraging, A-REITs still have a high correlation with the broader sharemarket. That means A-REIT share prices remain vulnerable to setbacks in the wider market, which worries some investors.
What role have foreign investors played in the Australian listed property recovery?
Foreign investors — particularly overseas super funds — have been major buyers of Australian property trusts. Even with a strong Australian dollar making purchases more expensive, these investors have favoured high-quality Australian property amid instability in Europe and the US.
What risk does reliance on foreign investment create for local A-REIT investors?
Relying on foreign interest can be risky because that demand may be fickle: changes in exchange rates or global conditions could prompt overseas super funds to sell. Morningstar warns that while capital gains could reverse, the income-return potential should remain relatively strong.
Can active property securities funds outperform the listed property index, and which funds stand out?
The article says the listed property sector is dominated by a few large trusts, making it hard for active managers to outperform the index once fees are deducted. Many funds show returns similar to the index after fees. Morningstar awarded only one fund its highest gold rating: the Vanguard Property Securities Index Fund, which mirrors the index and has low fees.
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