Australian REITs recovery continues but future growth still a challenge
- Singapore REITs posted highest one year return of six countries, including Australia, examined in Ernst & Young’s latest global REIT report
Monday, 5 November 2012 — Real Estate Investment Trusts (REITs) around the world continue to show signs of recovery but still face some challenges, especially in raising fresh capital, according to Ernst & Young’s Global perspectives: 2012 REIT report.
Ernst & Young Asia Pacific Real Estate Leader Chris Lawton says in Australia, REIT management teams are focused on strategies to enhance returns following a two-year period of strengthening balance sheets by restructuring debt and selling assets, especially assets held offshore.
“Most Australian REITs are in a stronger financial position today but memories of their losses during the financial crisis still linger and some investors are putting money into unlisted property funds and direct investment that otherwise might have been invested in Australian REITs.
“Most REITs are focused on the Australian market and have gone back to basics by concentrating on clearly defined sectors of the market that complement their core competencies and generate reliable income streams, mainly from rentals,” Mr Lawton said.
Mr Lawton says globally REIT markets made solid gains in the latter half of 2011 and first half 2012 data confirms this trend.
“Continued growth depends heavily on key aspects of their regional economies as well as the overall global outlook,” Mr Lawton said.
Of the six REIT jurisdictions examined in this year’s report, Singapore had the best return performance in the year to June 2012. The one year rate of return for Singapore REITs (S-REITs) exceeded 21.8%, a performance which put the country’s US$30 billion REIT sector ahead of Japan (17.4%), Australia (15.6%), the US (15.6%), the UK (14.8%) and France (11.85%).
IPO activity across all sectors of the global economy was hit hard by the downturn, as Ernst & Young reported earlier this year in its Global IPO update. There was a 40% decrease in global IPO activity in 2011 and this trend continued into 2012. The REIT report says that during the first quarter of 2012, of the six countries analysed only the US registered any IPO activity reflecting the discount to net asset values of security prices in the other REIT markets.
REIT prospects picking up
The global financial crisis had a severe and lengthy impact on security prices relative to net asset values in the REIT market but the prevailing trend is clearly upward. But even as the cost of capital improves the challenge remains for REIT teams to drive future growth through astute acquisitions, careful asset management and well-timed dispositions — all within an appropriate capital structure.
Mr Lawton says coming out of a period of recessionary pressure, the big challenge for REITs is how to grow again.
“Many will focus on internal growth – finding ways to operate more efficiently, cutting costs and improving property fundamentals – but acquisitions will again be a focus, and a challenge will be to find appropriate opportunities in a competitive market that is also seeing continued interest from offshore buyers.
Particularly in the US, but also perhaps wider afield, Ernst & Young expects to see the creation of more non-traditional REITs.
“In the US we are seeing growing interest among a broad range of corporate owners who are taking a serious look at taking their non-core real estate assets and creating a REIT structure to own and manage those assets,” Mr Lawton said.
Some of the business sectors that have seen recent REIT formation include homebuilding and data storage facilities. Other areas being considered include telecommunication cell towers.
Among the other country highlights detailed in the report:
French REIT stocks, buoyed by strong earnings, rebounded in the first half of 2012 following steep declines in 2011. But the country’s REITs are still trading at significant discounts to Net Asset Value (NAV) and this has put a squeeze on their ability to raise new equity. They are able to access relatively low cost debt, however, and foreign investors are increasingly interested in the French REIT market.
Japan’s REITs were dealt a double blow from the global recession and stock market volatility following the March 2011 earthquake. More than a year later, the sector has recovered dramatically to the point that IPOs are again taking place. The direct challenge for J-REITs is developing suitable long-term growth strategies such as property diversification. Many of the country’s REITs are focused purely on office markets.
Singapore’s relatively young REIT market continues to evolve. Hit hard by the global downturn, the outlook for the next year looks relatively good, assuming there are no further setbacks in the global economy. With little opportunity to grow through acquisitions currently, S-REITs are focused on more efficient management of existing assets.
The UK government is committed to growing the REIT sector, especially in the residential property market, and has relaxed several key measures relating to REITs to encourage that growth. The sovereign debt crisis in Europe put a dampener on some of those plans, but it is hoped that continued recovery in the sector will eventually lead to more growth. A potential barrier, however, is the fear that UK REITs are susceptible to takeover by private investors due to their trading at steep discounts to NAV.
The US REIT market has recovered from its partial collapse in 2008, outpacing returns in the S&P 500 by 6% in 2011. A third of the US REIT market increased their dividends last year. Nevertheless, new REIT formation has been slow and the recovery within US real estate markets uneven. One area of growth has been in the non-traded (unlisted) REIT sector and — despite challenges in that sector relating to fee structures, transparency and valuation — further growth could be on the horizon and there is the potential for some larger non-traded REITs to list.
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