The global listed-property sector performed well in 2012 and the Australian real estate investment trust (REIT) market has strong prospects for 2013, according to asset management firm Principal Global Investors.
Principal released a report on global real estate securities last week, noting that a “fundamental improvement” across real estate markets had seen the benchmark FTSE EPRA/NAREIT index deliver returns of 23.8 per cent in the 11 months to November last year.
The report describes Asia as a “wildcard” region for REIT investment, and Principal says it favours Australia today. “Australian REITs have recapitalised their balance sheet and offer attractive valuations and dividend yields,” the report says.
“Australia’s early 2012 decision to adopt accommodative monetary policy provided an attractive catalyst for real estate stocks.”
Out of fixed income, into equities
Alastair Gillespie, Principal’s Singapore-based managing director of portfolio management for real estate, says Australian REITs continue to be attractive as investors chase yield in a low interest rate environment.
“Over the last 18 months the Aussie REITs have done a lot to win back market confidence, because for a while Australia was one of the worst performing REIT markets,” says Gillespie. “But the Aussie REITs have been behaving themselves. They have been reducing debt, conducting buy-backs and exiting some of the European and US assets which were causing some of the problems.”
Most listed-property funds derive around 80 per cent of their incomes from “passive rent collection from commercial real estate.”
While global real estate yields were at around 4 per cent, Australian yields are just under 6 per cent – performance which is bringing new investors into the market.
“The fresh money coming into the sector is twofold,” says Gillespie. “There are Chinese investors and other Asian groups, and another big source of fresh money are the Japanese mums and dads, who are looking away from home for some returns.
“Australian mums and dads are also coming back to the sector, and while that relationship has been severely tested, their confidence is returning and the expectation is that fresh retail money will flow back into the sector in 2013.”
Gillespie expects investors to be “more risk tolerant” in 2013 as they judge that the danger of tail-risk events have diminished.
“Given that assessment, we see money coming out of more defensive fixed income market and into equities, and REITs will be one of the major beneficiaries of that.”