Real estate investment trusts are back in favour
Australian listed property had a spectacular 2021 year, ranking as the strongest performing sector on the ASX, rising by 27%.
What's more, the listed property sector - particularly retail, office and industrial - will continue to be boosted by high levels of immigration, capital flows, residential prices and growth in commercial rent, according to CBRE's 2022 market outlook.
CBRE is forecasting a steep rise in immigration that will boost demand for office space as well as retail spending over the next three years.
"In recent months, Australia has benefited from an uptick in white collar employment with the national unemployment rate at its lowest level in 13 years. This improvement in employment levels has translated into stronger tenant demand for office accommodation across Australia," says Grant Nichols, fund manager at Centuria Office REIT.
Nichols says there is demand for better COVID-safe work environments and increased demand to be located in areas that provide short commutes to improve employee satisfaction and attract the best talent.
The Australian listed property market is dynamic and growing, explains Ksenia Zaychuk, research manager at Morningstar.
She says that while it is slower than its global counterparts, Morningstar expects that, while it might take some time, A-REITs will include most of the so-called alternative subsectors that global REITs have on offer now.
Self-managed superannuation fund investors seeking income - particularly in retirement or near retirement - have traditionally held an allocation of listed property because of its historically high yield.
Listed property has way outperformed the income return generated from other sorts of income producing asset classes such as fixed interest and infrastructure since 2010, according to Morningstar.
"Given REITs have a strong focus on income, they remain a compelling solution for investors seeking higher-yielding assets," explains Zaychuk.
"AREITs have consistently generated higher levels of income than GREITs or global listed infrastructure," says Zaychuk.
SMSFs can invest in listed property by selecting a listed real estate investment trust on the ASX or a fund specializing in property. You can pick specialist REITs that specialize in a certain property sector such as office, retail, industrial, tourism and health services.
The number of constituents of the S&P/ASX 300 A-REIT market has increased to 31 from 21 between June 2011 and June 2021, explains Zaychuk. She says there are subsectors such as social infrastructure, agriculture REITs, industrials, and fund managers and developers.
"However, investors should be aware that these REITs tend to be smaller and have low market caps; hence, liquidity is a key watchpoint. Also, some of these subsectors are represented by a single security, which doesn't provide sufficient choice and diversification for investors," says Zaychuk.
As well as getting access to an actively managed property fund with a portfolio of properties, investors can invest in a diversified portfolio of REITs. There are also a number of exchange traded funds that track well-known indices such as Vanguard's Listed Property Securities Index ETF (VAP). It is a low-cost way to invest in a range of property including retail, office, industrial, tourism, and multi sector (diversified) REITs and companies that own real estate assets and earn their revenue from rental income. The ETF tracks the return (income and capital appreciation) of the S&P/ASX 300 A-REIT Index and holds 33 different REITs. The investment management fee is 0.23% per annum.
There are also global listed property funds that offer an array of sector specialist and diversified REITs. There is a wide choice of active and passive vehicles. For example, investors in global real estate can get exposure to healthcare and facilities REITs (for example, science labs), triple net leases (where the tenant pays additional costs), specialized REITs (for example, student accommodation and senior accommodation), manufactured housing, data centres, and other property that the Australian market doesn't yet offer, explains Zaychuk. Investing in global REITs allows investors to access exposure to distinct risk/return profiles as different countries tend to experience different parts of the economic cycle.
Zaychuk says that while higher levels of concentration have potentially contributed to net outflows from the Australian listed property market, the role of A-REITs in a diversified portfolio shouldn't be discounted.
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