REIT returns dip in October amid comeback

Listed real estate investors saw monthly returns dip in October over interest rates, however the monthly wobble was a small setback compared to the sector’s broader comeback.

Listed Australian real estate investment trust (REIT) returns fell slightly last month, with the S&P/ASX 200 A-REIT index – a key benchmark for listed REITs – down about 2.5 per cent month-on-month.

The monthly dip comes as REITs have rallied over the past year, with the key REIT benchmark up about 42 per cent over the 12 months to the end of October.

Listed REITs are traded on the ASX and other stock exchanges, allowing investors to buy and sell shares in commercial and residential real estate, including offices, shopping centres, warehouses and multi-family properties.

Amy Pham, portfolio manager for the Pengana High Conviction Property Securities fund, told Realcommercial.com.au that the October decline was a result of moderating market sentiment following the US interest rate cut in September.

“Everybody got a bit excited in September when the US cut interest rates and they thought Australia might follow,” Ms Pham said. “But then the commentary that came out from the Reserve Bank was quite hawkish and there was still a fight against inflation.”

Inflation sunk to a three-and-a-half year low of 2.8% in the September quarter, according to the latest figures from the Australian Bureau of Statistics. However, the market and many economists still expect the RBA to make its first cash rate cut in the first half of next year.

Industrial and logistics-focused REITs have tended to perform better than other REITs in recent years. Picture: Getty

REA Group senior economist Eleanor Creagh said it was clear the RBA was of the view that the level of demand in Australia was still too high relative to supply.

“The September quarter CPI reflects that although restrictive monetary policy continues to bring demand and supply more into balance, there is further to go,” Ms Creagh said. “As a result, we expect conditions for a cut will not arise before the years end.”

Ms Pham said REITs were benefitting from stabilised interest rates, as well as the prospect of looming rate cuts.

“We’re not economists, but whenever the RBA cuts interest rates, A-REITs tend to outperform,” she said. “The data shows A-REITs tend to move early, outperforming on average four months before the first interest rate cut.”

The other driver behind the REIT comeback over the past year has been that REITs were trading at prices that were cheap compared to their book values – or the value of their assets.

Most REITs were hit hard during the pandemic, with share prices falling out of fear about the values of offices, shopping centres and other commercial real estate, and what the future held for them.

To be sure, warehouses bucked the trend and industrial and logistics REITs have outperformed the sector.

But there is growing optimism in the property sector that yields in other commercial property asset classes such as retail are starting to stabilise, and that has driven some investors to buy REITs while their share prices were cheaper than their book values.

Ms Pham said the pandemic had also forced REITs to improve their operations as well, including reducing debt and selling non-essential properties to strengthen their balance sheets. All of these factors were contributing to the rally seen over the past 12 months, Ms Pham said.

The broader Australian share market also finished lower in October, with the ASX 200 down about 1.3 per cent during the month.