The volatile sharemarket and low interest rates have led to a significant cash inflow to Australian real estate investment trusts, according to a number of new reports.
Despite this, the overall AREIT or sector had a weak year of performance compared to the overall equity market.
AREITs are the main owners of office, retail and industrial assets in the country.
The Mid-Year 2016 S&P Dow Jones Indices Versus Active Funds (SPIVA) Australia Scorecard, as at June 30, 2016 reveals AREIT funds continued to perform poorly, with almost nine out of 10 funds failing to beat their relevant benchmark index (S&P/ASX 200 AREIT) over the one-year period.
The report, issued biannually by S&P Dow Jones Indices, tracks the performance of almost 1000 actively managed equity and bond funds in Australia against their relevant S&P DJI benchmarks over one, three and five-year horizons.
It showed 87.50 per cent of equity AREITs underperformed the S&P/ASX 200 AREIT in the one-year period and 93.06 per cent underperformed the benchmark in the three-year period.
The SPIVA Australia Scorecard reports on the performance of actively managed Australian mutual funds against their respective benchmark indices over one, three, and five-year investment horizons. In this scorecard, S&P evaluated the returns of more than 608 Australian equity funds (large, mid, and small cap, as well as AREIT), 294 international equity funds, and 66 Australian bond funds.
The report says AREIT funds recorded an average return of 22 per cent, lagging the benchmark, the S&P/ASX 200 AREIT, by 2.5 per cent in the 12-month period.
But ratings agency Moody's Investors Service, has a different view saying the outlook on the Australian real estate investment trust sector remains stable, as it has since 2009, as expansion in the gross domestic product continues to drive modest retail spending and growth in white-collar employment.
The outlook further reflects Moody's view that aggregate annual average like-for-like net operating income growth for its 12 rated AREITs will approach 2.5 per cent during the coming 12-18 months, excluding growth from acquisitions, investments and developments.
"This growth will be driven by contracted rent increases on existing leases and broadly steady vacancy rates, and the expected pick-up from the 2 per cent average income growth of the last 12 months is attributable to improved demand for office space in Sydney and, to a lesser extent, Melbourne," said Maurice O'Connell, a Moody's vice-president and senior credit officer.
"During the next 12-18 months, Moody's expects overall steady vacancy rates and contracted rental income to support the office segment."
In this context, Moody's sees operating income growth of 2 to 2.5 per cent for this segment on continued low vacancy rates in the central business districts of Sydney and Melbourne and the high percentage of office rental income contractually in place for more than a year. GPT Group (A3 stable), Mirvac Group (Baa1 stable) and DEXUS Property Group (A3 stable) will benefit from their exposure to Sydney and Melbourne.
Moody's notes that demand for space is also bolstering the retail segment, which will likely see operating income growth of about 2.5 per cent.
Moody's Investors Service says that Australia real estate investment trusts have a large amount of headroom under their gearing and interest cover covenants, which reduces their risk of covenant breaches in the event of significant operating or financial challenges.
"This strong positioning is primarily due to their conservative approach to debt management, while asset recycling and use of capital partners to share development risk have also contributed to the sector's strong financial profile," Mr O'Connell said.
