Principal Global Real Estate Securities releases its Q1 2017 update for the Global Real Estate Securities market. The first quarter of 2017 saw Australian real estate investment trusts (AREITs) underperform general equities in a trend continuing from the second half of 2016, according to Principal Global Real Estate Securities in its latest quarterly update.
Janine Yoong, Portfolio Manager, Principal Real Estate Investors, says while AREITs continue to lag behind the broader market year-to-date, there has been a tailwind to AREITs as the second quarter has begun.
“Following the FOMC meeting in March, and despite the Fed raising interest rates, commentary from the Fed has pointed to gradual rate hikes for the remainder of the year. This has resulted in bond yields retracing since the middle of March and lending support to AREIT valuations,” says Ms Yoong.
The February earnings season delivered mixed results, with cap rate compression continuing to come through. Other key insights include:
- Retail sales have showed signs of slowing; a trend that does not bode well for future rental growth, Meanwhile, office market conditions in Sydney and Melbourne continue to tighten, with rent continuing to grow and incentive levels reducing,
- Residential activity remains healthy, with settlements at elevated levels and default rates remaining low,
- Fund managers continue to enjoy elevated performance and transaction fees, and
- AREITs continued to report cap rate compression in their portfolios, underpinning Net Tangible Asset growth over the period.
The first quarter of the year saw growth names outperform while retail names underperformed. Stocks offering higher growth profiles generally outperformed, while AREITs with discretionary retail exposure lagged, especially at the large cap end of the market. Discretionary retail names were weighed down by concerns around retailer bankruptcies as well as the impact of growing market penetration of online retail.
Ms Yoong says global risks are weighing on investors’ minds, lending support to AREITs of late.
“As a defensive market in the APAC region, AREITs are the beneficiaries of heightened geopolitical risk. The market will be watching North Korea closely, particularly following Trump’s recent actions in Syria, which may be a sign that he is prepared to act unilaterally. With European elections adding to the uncertainty and the feeling that we are in ‘limbo’, this could be supportive for defensives in the second quarter.”
