While Australian investors love invest in property. REITs is one of the most accessible means for individual investors to gain exposure to Commercial Real Estate. The combined market capitalization of the Australia Real Estate Investment Trusts (AREIT) or Listed Property Trusts (LPT) listed on the ASX rivals the other major sectors of the mark (financials and miners).
The popularity of the REITs is due to its ease and simplicity for investors to gain exposure to commercial real estate as it is simply not feasible for investors to own commercial properties themselves given the level of management requiremets and the minimum amount required per investment.
What is often forgotten in the good times is that real estate is an illiquid asset clases. The time it takes to do a real estat deal can span 3 to 6 months and liquidity risk is a real risk in this space.
Listed vs Unlisted REITs
Long term investors like super funds have dedicated portfolio allocation to real estate either directly or indirectly through unlisted real estate funds. Unlisted REITS are illiquid funds and investors only enter and exit when there is cash on hand, when there are new investors replacing the exit investor or assets are sold to fund the redemptions. Recent examples of Host plus trying to leave its unlisted investment will be interesting to see how much discount is required to exit such a large position.
With prior research, ASX REITs allows individual investors direct access to a diversified portfolio of real estate in their portfolio in a much more managable form and limited risk of capital being locked away. The downside of the fund being listed is the price can deviate from the net tangible asset and since it is quoted daily there is a degree of mark to market risk.
Whats in the ASX 300 REIT Index (XPJ)?
The REIT index is a market capitalization weighted benchmark of all of the real estate investment trusts which has been included in the ASX 300 index. The list of REITs range from traditional sector REITs to alternative specialists trusts and operating business such as commercial real estate developers.
List of ASX REITs
|1||GMG||Goodman Group||Industrial||$2,787 Mil||25.32%|
|2||SCG||Scentre Group||Retail||$1,199 Mil||10.90%|
|3||DXS||DEXUS Property Group||Office||$979 Mil||8.90%|
|4||MGR||Mirvac Group||Diversified||$913 Mil||8.29%|
|6||GPT||GPT Group||Diversified||$760 Mil||6.90%|
|5||SGP||Stockland Corporation Ltd||Diversified||$835 Mil||7.58%|
|7||CHC||Charter Hall Group||Diversified||$449 Mil||4.08%|
|8||GOZ||Growthpoint Properties Australia Ltd||Diversified||$247 Mil||2.24%|
|9||SCP||Shopping Cntrs Austrls Prprty Gp Re Ltd||Retail||$238 Mil||2.16%|
|13||CLW||Charter Hall Long WALE REIT||Diversified||$210 Mil||1.91%|
|10||BWP||BWP Trust||Retail||$236 Mil||2.15%|
|12||CMW||Cromwell Property Group||Office||$214 Mil||1.95%|
|11||VCX||Vicinity Centres||Retail||$228 Mil||2.08%|
|16||ABP||Abacus Property Group||Diversified||$167 Mil||1.52%|
|15||CQR||Charter Hall Retail REIT||Retail||$183 Mil||1.67%|
|17||NSR||National Storage REIT||Specialized||$149 Mil||1.35%|
|19||CIP||Centuria Industrial Reit||Industrial||$116 Mil||1.05%|
|18||INA||Ingenia Communities Group||Residential||$136 Mil||1.23%|
|21||COF||Centuria Office REIT||Office||$100 Mil||0.91%|
|20||AVN||Aventus Group||Retail||$108 Mil||0.98%|
|22||CQE||Charter Hall Social Infrastructure REIT||Specialized||$85 Mil||0.78%|
|24||IAP||Investec Australia Property Fund||Diversified||$70 Mil||0.63%|
|23||ARF||Arena REIT No 1||Healthcare||$72 Mil||0.66%|
|25||RFF||Rural Funds Group||Specialized||$67 Mil||0.61%|
|26||URW||UNIBALWEST/IDR UNRESTR||Retail||$61 Mil||0.56%|
|27||GDI||GDI Property Group Ltd||Office||$60 Mil||0.54%|
|28||HMC||Home Consortium Ltd||Retail||$57 Mil||0.52%|
|29||ADI||APN Industria REIT||Industrial||$47 Mil||0.43%|
|30||HPI||Hotel Property Investments Ltd||Specialized||$41 Mil||0.38%|
After the takeover of Westfield by Unibail-Rodamco the sector exposure of the listed property trust is no longer dominate by a single sector (retail) or like the broader market which is dominated by financials or miners.
The diversified sector are REITs which invests across multiple commercial real estate asset classes.
Passive investing in REITs
REIT ETFs are listed exchange traded funds which invests in a portfolio of REITs. Rather than trying to beat the market, these are passive investment funds which aim to track the index at a low cost. It does not take active risk e.g stock selection in picking winners or losers. The index fund just owns the sector.
Listed Property Trusts Asset Classes
Traditionally the REITs focused exclusively on specific sectors in the real estat asset classe such as office, retail or industiral sectors. For example Westfield being the best example of a dedicated Retail REIT.
Office – Core and Core plus office can be considered the bread and butter of the listed REITs. They often own some of the best Prime and Grade A Office properties in Australia and are rarely traded.
Dexus, GPT and Mirvac can be considered the major players in the Core Office real estate segment. There is also a subset of office strategy which focuses on commercial office buildings in the metro or non-CBD locations.
Industrial – Industrial assets are commonly represented by warehouses, logistic centres and in some instances even business parks but what is not commonly known and not show on the front page of the annual report is that these funds also owns light manufacturing sites (i.e light factories).
Growth in industrial rents are linked to overall economic activity, release of land for industrial developement, rollout of ecommerce retailers and current limited land supply in key industrial markets.
Retail – Retail assets can range from Prime Shopping centres like Scentre, operator of Westfield in Australia to Charter Hall Retail Trust and SCA which predominantly owns neighbourhood shopping centres which are centers anchored by 1 or 2 supermarkets.
Developers – REITs are rent collection vehicles which passes on the rents it collect to the owners of the trust. Developers on other hand aim to profit from turning empty lots to something worthwhile.
Large commercial developers like Lend Lease and CIMIC are diversified across sectors and geographies. Mirvac provides Office and Residential exposure. Scentre mostly focus on expansion of its own Westfiled portfolio in Australia.
Listed residential developers like Mirvac and Stockland primarily focus on apartments and Master Planned Communities.
Real Estate Fund Manager – Some of the REITs are stapled structured with a real estate funds management business. The earnings are based on the base and performance fees it charges on the property funds it manage.
Specialist REITs – Specialist REITs invests in niche properties that are suited for particular sector. These include healthcare, childcare, data centres, storage and pubs. While the US REIT market can support number of specialist REITs within the same sector. There are limited comparables within each niche due to limited asset availability for competitor funds to gain scale.
Australian REITs were burnt pre GFC investing in going offshore and becasue of their chequred history most of these funds have now exclusively focused on investing and developing Australian assets.
What are the key drivers of REIT returns?
It is important to note that each asset class comes with its own set of risk and reward profile but there are common fundamental principals which drive the value creation in the sector. This list is not comprehensive but a quick explanation of the factors.
As with anything in the markets it is all about supply and demand. In real estates case, rents is a representation of the markets supply and demand for that particular product. As employment increase, the demand for office increase which will drive increase in rent.
Similar to bonds, real estate assets are quoted in yields. For example that office building trade for 5%. A yield is simple an inverse of the multiple and as as rents increase given the same yield the value of the asset increases.
The interest rate environment is an important context for returns as debt plays an important role in funding real estate.
The income stream of a real estate investment trust is typically measured verses 10 year bond as a measure of relatively value. Hence overall returns in the short and medium term can be influenced by interest rate expectations.
REIT Distributions (LPT Distributions)
One of the key characterics of real estate investments is its income heavy nature and that income being tax efficient has attracted yield focused investors.
REIT Distributions does not have franking credits because the income is not taxed on the trust level before it is distributed to investors. Trusts by law have to distribute between 90% to 100% of its earnings.
Australian company dividends have franking credits because tax has already being paid. AREIT distributions do not have franking credits because income are not taxed at the trust level. A trust governs the relationship between the trustee and the individual investors. In the simplest sense, trusts collect the income and pass it onto the investors.
Tax deferred distributions
Distributions are taxed on the individual tax rate. REIT distribution also included a tax deferred component. Tax deferred component represent the return of capital rather than income. This exist because as REITs collect income, the manager can decide if the payments made to its owners are the income collected or capital the investor put in.
A tax deferred portion of the distribution means that component of the distribution is a return of capital. Hence tax is not payable but the investors cost base of that unit is reduced by the same amount and when the units are sold, the capital gains are calculated off the lower base so evenutally tax will have to be paid as it is not a free lunch.
Tax Deferred Distribution example
If the value of the REIT distribution is 10 cents which is made up of 5 cents of tax deferred component and the cost base of the units were $1. Immediately after the distribution the cost basis of the investment is reduced by 5 cents to 95 cents.