“Property price slump slows from record speed” and “Sydney’s property market is in a historic annual price fall.” These are two of many headlines plucked from major news publications in Australia to start 2023.
Although these headlines relate to residential property markets, a similar headline could have been used for listed real estate investment trusts (REITs) in 2022. In 2022, the S&P/ASX 200 A-REIT Index declined by -21.46 %. Investors may wonder whether the decline will continue in 2023. Investing in Real Estate Investment Trusts: What are They? REITs are companies that own, operate, or finance income-generating properties. REITs allow investors to gain exposure to real estate assets without directly owning them. There has been rapid growth in Australian REITs over the last few years, with a growing number of investment options available. Low interest rates, a stable economy, and investor demand have all contributed to this growth. Your local financial planning Newcastle services (or whichever town you live in) may be able to provide more information about REITs. There are Many Advantages to Investing in REITs To avoid taxation at the trust level, REITs must pay out at least 90% of their taxable income in dividends to shareholders. This is one of their key advantages. For investors seeking a steady income stream, REITs are an attractive option due to the low interest rate environment. How attractive are REITs now that interest rates are rising? The key phrase in the preceding sentence is "in a low-rate environment." The million-dollar question is whether or not property investments become less attractive if interest rates continue to rise. This may be true for residential property investment, but there are a few key factors that may offset it. Trends in REIT Performance It is forecast that interest rates in Australia will increase by 50 to 100 basis points this year, which means real estate investors are in for another tough year. The average return on Australian listed REITs has been 7% during the last seven RBA tightening cycles (increased interest rates). It is important to understand why the RBA raises the cash rate in order to decode the above data. Lower unemployment rates, increased wages, and higher consumer spending increase inflation. Rents will rise during a cycle when they are highly correlated with the Consumer Price Index (CPI), and revenues will remain high once interest rates stabilize in a cycle when rents are highly correlated. The declining gearing rates of REITs will benefit them once interest rates peak. They are down from 46% 15 years ago to 27.5% on average. Experts have taken this even further by overlaying 30 years of RBA cash rate data with a 30-year performance chart of the S&P/ASX 200 A-REIT Index (XPK). A-REIT returns are assumed to be negatively correlated with changes in cash rates, but the chart below shows that interest rates aren't always the driving force behind real estate returns. Between 2001 and 2009, there is a positive correlation between the two data points in the chart above. In the wake of the dot-com crash, investors turned away from internet stocks, and they looked for safer investments rather than investing in REITs due to the current cash rate. Financial planning Newcastle services can help. REITs: The Future The property market is concerned this year that property valuations will be lowered. As interest rates rise, capitalisation rates (cap rates) on properties rise. As a result of higher cap rates, investors expect a greater return on their investment, which reduces the value of a property. Because interest rates have increased, government bonds now provide investors with higher risk-free returns. Due to the increased risk involved, investors expect REITs (and other investments) to yield higher returns. As a result, property values may fall, which in turn may increase yields. In 2023, cap rates across the REIT index are expected to rise, but some sectors will be more affected. The subdued leasing activity may result in a decline in valuations for office REITs as hybrid working takes hold. The cap rates of REITs specializing in healthcare and non-discretionary retail, on the other hand, can be relatively stable because landlords can raise rents in line with inflation. We recently reduced our weightings towards the aforementioned and increased our weightings towards the latter. To Summarize Investors need to consider a variety of factors when investing in REITs, including the quality of the underlying properties, the management team, and the company's financial health. Investors should also consider overall risk profiles in addition to dividend yields and capital growth potential. Given a -20% decline in the REIT index, 2022 should be a better year for REITs. Please contact your local financial planning Newcastle services (or whatever town or city you live in) if you have any questions. Related Blog: What You Need to Know in Investing in Your Children’s Future
1 Comment
19/9/2023 02:30:24 am
Of late, Some give a lot of thing to consider in order to providing comments on location web site posts and have put comments even a smaller amount. Examining your pleasant publish, may assist us to do this at times.
Reply
Leave a Reply. |