Listed Property: Retail Property Demand Drags Market in 2019

investment strategy

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By

Paul Ashworth, Managing Partner
David Clark, Director
Antony James, Analyst


Posted 11 February 19

The listed property (A-REIT) market as a whole experienced a difficult 2018 as the spectre of higher rates early in the year, contracted earnings multiples.

This weakness was driven by the poor performance of Retail focused REITs, which comprise the majority of the market index, whereas Industrial and Office REITs delivered good returns.

Office Property

The Australian office market has remained relatively tight over the past year, with an upward trend in office rents for both Sydney and Melbourne due to dropping incentive levels. This market sector has been supported by the continued strength in the employment market, with the unemployment rate dropping to a low of 5.0% in the second half of the year. Exposure to this sector is consistent with the population-driven growth that we expect to see from the Australian economy in the coming years.

Retail Property

In contrast, the retail market sector has been experiencing patchy demand due to sector-specific headwinds – i.e. Amazon's entry into Australia. The upheaval surrounding the changing buying patterns of Australian consumers (online vs. brick and mortar), coupled with the entrance of overseas competitors, has seen the withdrawal of some anchor tenants from shopping centres. Smaller neighbourhood malls and older centres have been the most impacted, with higher-end centres holding up well.

Listed Property Yield (Net) vs. 10-Year Bond Rate

Industrial Market

The industrial property segment remains supported by long-term demand for improved logistics/supply chain infrastructure. As a bond proxy, it will continue to be impacted by the market's views on long-term interest rate movements. The important measure is whether the quantum on distribution increases can rise faster than long-term bond expectations.

The A-REIT market is expected to generate a gross dividend yield for investors of ~5.0% in 2019 and is currently trading on a yield premium to the 10-year government bond rate of 2.0%, which is equal with the historical average.

We remain positively disposed to the Australian office and industrial property market and will seek to maintain our exposure to high quality, lower geared investments.

Economic and Investment Strategy

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This article is part of our 2019 Economic and Investment Strategy Guide and one such starting point in our highly considered process that will ultimately manage downside risk and maintain the real value of capital.

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