the background story
Australian listed property has had a tumultuous past decade. The characteristics of the sector have changed dramatically through that period and now look to have come full circle.
Originally, A-REITs (Australian Real Estate Investment Trusts) provided access to traditional property investments that aimed to provide consistent income streams and some element of growth.
In the period 2002 until 2007, the characteristics of A-REITs changed quite considerably. During this time, there was a climate of easy-to-access financing and general exuberance about the future prospects of the sector. This led many A-REITs to increase their borrowing and expand their activities to non-traditional areas such as property development and fund management, increasing the complexity of their business.
Many investors warmed to these developments and this led to strong price gains for A-REITs.
the GFC and the big fall
~ When the GFC hit, A-REITs that had taken on too much debt were punished severely.
~ A-REIT prices fell dramatically – many experienced extreme difficulty in re-financing their debts against a backdrop of tighter credit. Difficulties were compounded by declines in the value of properties they owned.
~ Some A-REITs collapsed completely and effectively went out of business.
~ In order to survive, other companies needed to reduce their debt and had to recapitalise by issuing new equity at very depressed prices.
~ The survivors took a lot of the complexity out of their business structures, reduced their reliance on debt financing and returned to their traditional business models.
where to from here
The survivors of the GFC are now well placed. Based on underlying property valuations, the A-REIT sector appears undervalued. The physical properties owned by A-REIT’s are now worth more than is reflected in their price.
The major A-REITs have well diversified property portfolios that aim to deliver consistent income streams.
some examples of iconic buildings owned by A-REITs
|Melbournen Central Tower||Melbourne||GPT|
the circle turns – a return to traditional roots
We have noticed some investors are overly influenced by the post-GFC experience. They see the sector as exhibiting equity like price behaviour whereas, in truth, the sector has returned to its traditional roots and is now focused more on property investment and associated income. Return expectations from here should be set against this backdrop. Therefore, it is important to re-set our expectations for A-REITs.
Caution is warranted to avoid the pitfall of permitting recent experiences to unduly influence future expectations. Astute investors assess investment opportunities on their current merits.