Listed real estate sell off sparks increasing interest from investors

Australian’s love property, but when it comes to listed property, there has been little to love lately. The recent market downturn and tougher macroeconomic environment hit the AREIT market hard this year, but there are signs that may be turning around.

It’s a well-known adage that Australian’s love property, but when it comes to listed property, there has been little love spread around recently.

Listed Australian real estate investment trusts (AREITS) typically invest in commercial properties such as offices and apartment buildings, shopping centers and hotels. These are assets in sectors of the economy that are still navigating their way out of pandemic lockdowns. Vacancy rates for office properties are at or near record highs as large numbers of employees prefer to continue to work from home.

In contrast, the ongoing remaking of industrial supply chains to meet turbo-charged demand for e-commerce has kept industrial and logistics property vacancies at extraordinary lows.

With rising interest rates, AREITS are also exposed to higher debt costs, and these can impact earnings to varying degrees, especially for those trusts with higher gearing levels. In addition, higher interest rates increase the discount or cap rate used to value the expected cash flows from the underlying property, reducing an AREIT’s asset value. If property rents do not keep pace with rising interest costs, income distributions will potentially decline.

Property sector hit across the board

With a market value of $125 billion, AREITs are the largest part of the $350 billion investment products on the ASX, just ahead of exchange-traded products (ETP).

From its record high in early January to the end of October 2022, the ASX AREIT Index had lost over 25% of its value, making it one of the worst performing sectors on the ASX.

In contrast, in October the AREIT Index bounced back some 9%.

It is also possible that with the decline in prices to date, the inflation protection built into some AREITS, where rental income is adjusted by the CPI, and a view that rates may not be that far from their peak, could all assist the sector going forward.

Analysis of AUSIEX trading data indicates that this slightly more positive outlook may be attracting retail investors and some advised clients but has yet to spread to the wholesale market.

AUSIEX data reveals that the net traded value in AREITS (the total value of buy orders less the total value of sell trades) has been positive from May this year to the end of October, with the highest result in September. In fact, total net traded value is in line with 2021 levels.

The total traded value however, which adds buy and sell side trades, has been declining from a high point in June of 2021 to be 31% lower in October 2022.

Property security appeal

What the AUSIEX data also reveals is a major shift in the types of investors buying into the AREIT market.

Among AUSIEX account holders who trade AREITS, advised clients have doubled their net traded value over 2021 full year levels, while self-directed investors have more than tripled their net traded value.

The AREITS sector had long been viewed as a safe source of capital gains and regular income given assets of AREITs include such tangible assets, such as commercial office buildings, industrial properties, retail shopping centers, hotels and apartment buildings.

So, the data may indicate that in a period of economic uncertainty, smaller direct investors and those being with financial advisers may be looking to extend their positions in direct real estate through the AREIT market.

Changing investor profile

Another interesting element is the changing profile of these AREIT investors. When comparing those trading this year with those who traded in 2021, there were only marginal changes in the gender profile, females were 15.6% of total by account verses 17.4% last year, for example.

However, when considering age, the data shows that Generation X’s comprise of 41.8% of the total number of trades, up from 35.9% in calendar year 2021.

In summary, there may be a bounce in AREIT investing underway in certain parts of the investor landscape. It isn’t certain how long it may last, but we do know it appears largely being led by younger, self-directed investors.