On the cusp of strong years: BDO’s 30th annual A-REIT survey

Australian Real Estate Investment Trusts (A-REITs) are on the cusp of a period of healthy results, having rebounded from a couple of lean years to post a total return of 19.9 per cent in FY24, up from 3.1 per cent in FY23, new BDO analysis shows.

Celebrating its 30th anniversary this year, BDO’s long-running annual A-REIT survey found that A-REITs had outperformed the S&P/ASX 200 Index by 12.1 per cent despite high interest rates and inflationary concerns.

Industrial A-REITs did the heavy lifting, delivering an increase of 69.7 per cent in FY24, up from 12.4 per cent in the previous year. Goodman Group led an exceptional year for the sector, securing first place in our annual ranking for the second consecutive year.

Retail A-REITs delivered a 6.8 per cent increase, up from -0.8 per cent in the previous year, despite lower consumer confidence and foot traffic amidst cost-of-living concerns.

The office sub-sector continued to weather another difficult year, with structural changes of working from home, high interest rates and lower valuations forcing an annual return of -18.9 per cent, down from -13.9 per cent in FY23.

BDO in Australia’s transaction services national leader and A-REIT specialist, Sebastian Stevens, said the overall outperformance by the market despite subdued conditions was indicative of the resilience of A-REIT management teams.

“We’ve seen over the past three decades how A-REITs have been through plenty of ups and downs, and learning from those experiences, they are now more resilient and adaptable than ever,” said Mr Stevens.

“We’re seeing that now that in some of the worst conditions possible, they are still ensuring they produce a return for investors and setting up for future returns.

“A-REIT managers haven’t been afraid to make strategic revisions, re-evaluate their portfolios, and proactively refinance. The fact that A-REITs are still outperforming the ASX this year means it's well set up for growth now.”

Mr Stevens believes dovish interest rate expectations over the next 12 months could see a unique situation where all sub-sectors of the market could perform at the same time.

“Impending interest rate cuts will impact REITs positively given their high level of gearing and I do think that we're on the cusp of some good years for the market,” he said.

“The retail sub-sector will undoubtedly rise when rate cuts lift consumer confidence, the office sub-sector should see a revival once business growth and demand for office space returns, while the industrial sub-sector is not going to go backwards as demand for warehousing and data centres will not go away.

“In the past, office and retail were the usual high performers while industrial had more challenges getting traction, but it’s now a star and this could be the first time in a while that all three sub-sectors of the market could perform at the same time.”

Looking further afield, while alternative real-estate assets such as data centres, student accommodation, and build-to-rent assets have done well in recent years, Mr Stevens believes A-REITs will need to start considering the international market as quality Australian assets start to run out.

“The first mover advantage has been critical with the alternative asset class and A-REITs have benefited from cherry picking the ‘Rolls-Royce’ of assets, but those premium assets will become harder to find,” said Mr Stevens.

“The next phase of growth for the market, being international expansion, is probably a bit of a leap of faith for some of these funds given the previous foray wasn’t overly successful”.

 

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Jotham Lian
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E: Jotham.Lian@bdo.com.au
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