Money Australia - August 2019

Q

WhatisanA-REIT?

OwninganA-REIT

(Australianrealestateinvest-

menttrust),alsoknownasa

listedpropertytrust,is likeown-

inga shareinanylistedcompany,

albeitwithanimportantdifference.Instead

ofowninga smallsliceofa business,with

anA-REITyouownaninterestina large

buildingorpropertyportfolio.

A-REITsgeneratemostoftheir

incomefromtherentcollectedfromthe

tenantsoftheirretail,officeandindustri-

al properties.Becauserentshavetobe

paidwhethera companymakesmoneyor

not,A-REITstendtooffera morereliable

incomestreamthanotherlistedcompa-

nies,wheredividendpaymentsdepend

onprofitability.

Investorsbuya shareinanA-REITjust

astheywouldanylistedcompany.Butthe

reliabilityofdistributionsmeansA-REITs

usuallyattractinvestorsinsearchofregu-

lar,reliableincome.

TIMSLATTERY

Q

WhatshouldI lookforwhen

investinginanA-REIT?

Ultimately,theperformanceofan

A-REITovertimewillbeinfluencedby

theperformanceoftheunderlyingreal

estate.Therefore,considerationshouldbe

giventotheunderlyingsectorexposure

andthequalityoftheassetsandlease

structures.Forinstance,officeA-REITs

areinfluencedbythelevelofdemandand

supplyinthemarketwheretheyinvest.

Datapointssuchasvacancyratesand

white-collaremploymentgrowthcan

beusefulguidesforinvestors.

Additionally,investorsshouldconsider

variousfinancialmetricsinrelationto

thetrust:

• Capitalstructure,includingthe
  levelofgearinganddurationofborrow-
  ingsused.


• Predictabilityofearningsandthelevel
  ofearningsgrowth.


• The valuation of the A-REIT, in^
  terms of distribution yield and share
  price relative.
  Finally, investors should also take into
  account the quality and track record of
  the management.
  WINSTON SAMMUT

Q

How do A-REITs

measure earnings?

In its simplest form, an

A-REIT derives its earnings

from the rental income it receives

lessany payments it makes to the

manager of the trust and interest pay-

ments it makes on its borrowings, to

derive a net profit.

A-REITs with more complicated struc-

tures can also derive income from activi-

ties such as property development or

funds management and be required to

make additional payments, such as

employee expenses, if they have an inter-

nally managed structure. Also, unlike

a standalone trust structure, which pays

no tax, stapled A-REITs may also pay tax.

WINSTON SAMMUT

Q

Are A-REITs volatile?

Property is generally considered to

have a risk profile somewhere between

equities and bonds. As listed investments,

the prices of A-REITs are subject to daily

market volatility and are therefore

perceived as being more volatile than

unlisted property. However, over the

long term, there is a high degree of corre-

lation between the value of listed and

unlisted real estate.

STUART CARTLEDGE

Q

Do A-REITs perform better with

falling interest rates?

Traditionally, yes. Research indicates a

strong inverse relationship between prop-

erty trust share prices and interest rates.

When rates are falling, debt finance

becomes cheaper and the gap between

general rates and the yield paid by

A-REITs increases. This makes A-REITs

relatively more attractive, with investors

prepared to pay higher prices for access to

assets that deliver a relatively higher yield.

That said, investors need to examine

the reasons for falling interest rates. If the

economy is slowing and rents fall over

time, this may reduce property values

over the long term. Again, it comes back to

those important factors – location, tenant

quality, lease terms, debt levels and man-

agement quality – that determine how an

A-REIT will be affected by such forces.

TIM SLATTERY

Property trusts

give yield investors

access to big,

diversified assets

that would normally

be out of reach

10

MOST-ASKED

QUESTIONS