Listed funds investing in Australian commercial, retail and industrial real estate have been among the top performers during the past 12 months with sector returns of more than 28 per cent as they rebounded from the slump caused by COVID-19.
There is cautious confidence that market conditions will improve as vaccination targets are reached, according to analysis by the Property Funds Association and Property Council of Australia, but there are also concerns about the continuing impact of the pandemic and uncertainty caused by the possibility of new outbreaks.
Australian real estate investment trusts (A-REITs) at 28.4 per cent marginally lagged Australian equities at 28.8 per cent, and global equities outperformed both, returning more than 32 per cent.
Listed property took a 50 per cent hit at the outbreak of the pandemic in March last year, with the strong one-year return reflecting the recovery.
As an example, the share price of standout performer Arena, which invests in properties with long-term leases such as childcare and hospitals, has recovered to more than $4 after falling to about $1.48 in the initial market response to the pandemic.
‘‘The worst is behind us,’’ says Damian Diamantopoulos, a real estate portfolio manager and head of property research for wealth manager Australian Unity.
A-REITs specialising in shopping centres and malls are reporting a ‘‘snapback’’ in patrons and sales as restrictions are eased, interest rates remain low, employment stays high and hopes of economic recovery continue.
Investment bank JP Morgan expects the retail property sector to ‘‘rebound’’ once restrictions are eased.
‘‘We appreciate the structural pressures from online and cost inflation, but believe the market is underestimating the growth and re-rating potential,’’ it says.
Office patronage has fallen by 4 per cent to 12 per cent as stay-at-home orders keep workers away, analysts say, creating knock-on effects for service industries, ranging from restaurants to retailers.
However, major tenants have not relinquished leases, despite the debate about whether workers will continue to work from home, return to the office or reach an accord with employers on more flexible arrangements.
‘‘There is still uncertainty,’’ Diamantopoulos says. ‘‘Everyone is looking to the reopening of central business districts.’’
Macquarie Bank says returns are moderating because of structural changes and predicts the best performers will be looking for new avenues for growth.
Logistics and industrial real estate continue to benefit from the COVID-19 fallout and accelerating transition to a digital economy, such as the boom in vast storage spaces to cater for online shopping.
Major recent deals include ESR Australia’s $3.8 billion purchase of Milestone logistics property portfolio from Blackstone.
Also driving up stock prices are yield-chasing retail investors looking for better returns than cash (offering 0.3 per cent) or fixed income, which lost about 4 per cent.
Dan Cave, senior investment analyst for Zenith Investment Partners, says: ‘‘Despite challenges, there has been an impressive recovery across listed, unlisted and direct property against a backdrop of economic growth, lower unemployment, climbing vaccinations and retail confidence returning.’’
Unlisted property trusts posted gains of about 19 per cent following advances of about 15 per cent the previous year.
The sector averted a slump in the first half of last year and posted modest write-downs in asset values, which reflected the pandemic’s impact on office and retail property.
Listed and unlisted property trusts both involve investors contributing capital for a share of the asset in either shares (for listed) or units (unlisted).
Investors receive income (called distributions) and, if the asset values increase, a capital gain on their original investment from either the rising share price (for listed) or the sale of the asset (for unlisted).
Listed funds typically yield 3-6 per cent, and unlisted about 6-8 per cent, which includes a premium because there is little or no liquidity.
Some analysts say many unlisted trusts are aggressively leveraged (borrowing up to 50 per cent) to boost performance, which increases volatility risks.
Diamantopoulos recommends investors check with advisers whether the level of gearing is appropriate because it can magnify losses or gains.