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
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