Investment: Prime time for listed real estate

Australia’s Real Estate Investment Trusts (REITs) have regained popularity as investors seek high yielding investments in a low interest rate environment.

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Australia’s Real Estate Investment Trusts (REITs) have come back into favour in recent years as investors have sought high yielding investments in a low interest rate environment.

REITs can provide investors with a liquid, diversified income stream that should grow over time. But the daily pricing that provides the high liquidity brings with it greater short-term pricing volatility. Investors also need to be prepared to conduct regular due diligence on the underlying quality and risk of the investments.

INCOME YIELDS OVER TIME

A study of Australian REITs’ actual income yield over time shows the sector has consistently delivered an attractive income yield to investors. In terms of recent history, the forecast income yield for Australian REITs has traded at a premium to bond yields over most of the past five years. (See Chart 1 in the attached PDF report.)

So, in a market of low bond yields and a low cash rate, REITs have been able to provide a higher income yield, which has been a pleasing outcome for investors. There are several extra factors investors should also consider:

Diversification – a key attraction of REITs is that they are accessible to all investors. Their listed structure means that even small investors can own a piece of iconic Australian real estate assets such as Chadstone Shopping Centre in Melbourne or Bondi Junction in Sydney. Additionally, Australian REITs are well diversified across sectors (for example, retail and commercial) and stocks.

Liquidity – REITs are one of the few forms of property investments that enjoy a high level of liquidity owing to their listed structure. Investors can therefore sell a REIT investment and receive the proceeds in three days while typically incurring only low transaction costs, ie brokerage.

Volatility – the trade-off to having high liquidity is the volatility that comes with the daily pricing of REITs. Investors should note, though, that this volatility does not result from the underlying properties owned by the REIT being re-valued every day – it is simply a result of changes in the price that investors are willing to pay for the REITs on a daily basis.

DUE DILIGENCE

Any investment – be it shares, bonds or property – needs regular monitoring to ensure that it continues to meet an investor’s objectives. REITs are no different.

Once investors have become comfortable in Australian REITs as an income source, there needs to be an ongoing level of due diligence regarding the state of the investment. In particular, investors need to be confident that the REITs remain sound in terms of their balance sheets and management teams, and that the income generated is sustainable. This was certainly not the case immediately prior to the Global Financial Crisis (GFC) in late 2007. Thankfully, REITs have repaired and gone back to basics in terms of the rent collecting models pioneered by some of the original Listed Property Trusts in the 1990s. For more information, contact your financial adviser or visit antarescapital.com.au

Important information: Issued March 2015. Antares Capital Partners Ltd ABN 85 066 081 114, AFSL 234483 (‘ACP’), is the Responsible Entity of, and the issuer of units in, the Antares Listed Property Fund ARSN 090 826 592 (‘the Fund’). An investor should consider the current Product Disclosure Statement and Product Guide for the Fund (‘PDS’) in deciding whether to acquire, or continue to hold, units in the Fund and consider whether units in the Fund is an appropriate investment for the investor and the risks of any investment.

For a full report, including charts and a full disclaimer, download the full article here: (PDF, 753KB)