2012 REIT report

Australia: A-REITs focus on enhancing returns

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Current state

Over the past few years, Australian REITs, or A-REITs, have restructured their balance sheets by paying down debt and selling assets worldwide. From the end of 2009 until early March 2012, A-REITs covered by SNL, a provider of business intelligence services, sold 1,039 properties worth US$16.2 billion1.

While the ability of A-REITs to grow externally through property acquisitions or development has been limited, they are finding internal opportunities to enhance returns.

Market outlook

Today most A-REITs are in a stronger financial position; however, memories of their steep losses during the global recession and financial crisis still linger.

A-REITs have yet to win back the full trust of the investor community, and many of their shares continue to trade at discounts to NAV although recent months have seen that price gap continue to close. Some investors are putting money into unlisted property funds and direct investment that otherwise might have been invested in A-REITs.

Challenges

Financing issues: Larger players report that financing today is more available from a wider range of financiers, at lower margins and for longer durations. However, diversity of debt sources is still a concern to the approximately one-half of Australia’s REITs that are not rated and therefore do not have access to bond markets as a funding alternative. In earlier times, as an alternative or supplement to borrowing, A-REITs could raise equity capital in secondary stock offerings to help finance property investments. But the fact that A-REIT shares have been trading at discounts to NAV has precluded this option.

Opportunities

Today, a few well-capitalized A-REITs experienced in investing overseas continue to invest in global markets, but most A-REITs are focused on the Australian market. They 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.

Australia’s commercial property markets are reasonably healthy and are generating stable cash flows for A-REITs and other owners. The industrial property sector is improving and attracting more investment interest. Some retailers are struggling, but this has not yet had a significant impact on the market for investment in institutional retail properties.

Conclusion

While the ability of A-REITs to grow externally through property acquisitions or development has been limited, they are finding internal opportunities to enhance returns. In contrast with the early days of Australia’s public REIT market, when newly minted REITs were just starting, A-REITs are now experienced in operating through boom times and hard times, at home and globally.

And they will apply that experience in making strategic decisions about how to grow in 2012 and beyond.

  1. 1 Faraz Ahmed, “The A-REIT Road to Redemption,” SNL Data Dispatch, 8 March 2012, http://www.snl.com/InteractiveX/Article.aspx?cdid=A-14387509-133.

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