The ASX 200 AREIT Accumulation index rose by 11.04% over the
year ending 30 June 2012.
The AREIT sector significantly outperformed Australian equities
over the year. Having recapitalised their balance sheets since the
GFC, most AREITs are now conservatively geared and provide a
dividend yield of between 6-8% that has attracted investors seeking
alternative investments to cash. Falling bond yields have also
assisted valuations somewhat. Over the year a number of trusts
undertook buybacks including Westfield, Dexus, Stockland and GPT
which also supported share prices in the sector.
Those AREITs with relatively stable rental income streams will
continue to attract interest from investors in this low interest
rate environment. An investor would prefer a yield of 6-8%, as
against a cash rate of 3.5% or a 10 year government bond yield of
3.1%. Nevertheless, the prospects for the sector over the short to
medium term remain somewhat muted for the following reasons:
The office sector relies heavily on financial services where
activity remains subdued due to the poor state of financial
markets. Additional supply coming on-line in cities including
Sydney may put additional downward pressure on rents.
While the retail sector has held up well to date, lease
renewals in coming quarters will inevitably result in lower rents
given lacklustre retail sales exacerbated by the structural shift
to on-line shopping.
The high value of the AUD coupled with slowing rates of growth
with our key export markets is likely to suppress rental growth in
the industrial sector, although supply constraints remain broadly
High levels of household debt will continue to limit trusts
with residential development exposure. Lower interest rates
together with developers focussing on delivering cheaper housing
stock will provide some relief.
In conclusion, while yields and discounts to net asset values
remain supportive of valuations, the macro environment remains
unappealing. For these reasons we continue to recommend a mild
underweight exposure to this asset class.
The Council announced planning policies to encourage more inner suburban retirement village and aged care development.
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