The evolution continues as industrial A-REITs gain ground

Industrial A-REITs have gained prominence, propelled by e-commerce growth. Picture: Rebecca Michael

Australian real estate investment trusts struggled to keep pace with the broader market for much of 2023, weighed down by higher interest rates and concerns about some asset classes.

However, A-REIT prices staged a remarkable recovery in the six months to the end of March, delivering a total return of 35.3 per cent, significantly surpassing the 14.2 per cent total return from equities.

This resurgence coincided with major global central banks revising their stance on interest rate forecasts, with the market anticipating rate cuts in the latter half of 2024.

The A-REIT sector has certainly experienced a roller coaster ride in recent years. Prices plummeted by more than 25 per cent from their peak in January 2022 to the trough in October 2023, triggered by spikes in cash rates and bond yields.

A-REITs have often been treated as alternatives to bonds, hence they were sold off alongside bonds. As investors re-enter the A-REIT market, the key question arises: what will the sector look like in the next 12-24 months?

One characteristic of the A-REIT sector is its perpetual dynamism. It possesses an impressive capacity to adapt and evolve, characterised by periods of heightened initial public offers and merger and acquisition activity.

It is useful to look at past events to determine what the future may hold for the sector.

During the span of 18 months between 1999 and 2000, which marked one of the most prolific periods for M&A activity in the sector’s history, 21 A-REITs either merged or were privatised.

Notably, many entities that acquired these A-REITs, such as BT Office Trust, Property Income Investment Trust, and Armstrong Jones Industrial Fund, no longer exist today, having undergone mergers or privatisations in subsequent years.

Over the years, the number and composition of A-REITs in the S&P/ASX300 A-REIT Index has evolved in response to the economic and secular trends reshaping the real estate industry.

Sectors such as diversified, retail, and office, which once dominated the A-REIT landscape, have yielded ground to specialised counterparts such as self-storage, pubs, debt, rural, and healthcare A-REITs.

Industrial A-REITs have gained prominence, propelled by e-commerce growth and the Goodman Group’s recent expansion into data centres, as the market has backed its expansion with billionaire Greg Goodman at the helm.

In 2000, diversified A-REITs comprised 37.9 per cent of the index, decreasing to 26.1 per cent by 2024. Retail and office sectors have also seen declines, falling from 34.9 per cent to 24 per cent and 19.1 per cent to 6.2 per cent, respectively. Hotels, once comprising 1.5 per cent of the index, have vanished, with the three hotel A-REITs either merged or taken private.

Hotel Property Investments, currently listed, owns pubs not hotels, and is categorised as a specialised A-REIT. Meanwhile, industrial A-REITs have risen from 6.6 per cent to 37.7 per cent.

Adrian Harrington.

Specialised A-REITs, previously non-existent, now represent 3.6 per cent of the Index, with healthcare A-REITs comprising a further 1.2 per cent.

After a prolonged period of consolidation inertia, M&A activity has recently returned to the sector.

In January, BWP Trust initiated a bid for Newmark Property Trust, which is run by Chris Langford and Simon Morris. The offer was extended last week as about 81 per cent of unit holders have accepted the offer.

 Aspen Group also made an unsolicited bid for Eureka Property Group in January, though Eureka’s directors advised against it (the latter is a listed property entity rather than a trust).

Filetron, a private group, has emerged with a 19.9 per cent stake in Eureka and advised the Eureka directors that it won’t support the Aspen offer.

In a further sign of market activity, Charter Hall and the ASX-listed Charter Retail Trust recently acquired a 14.9 per cent stake in Hotel Property Investment.

Charter Hall chief executive David Harrison’s strategic plans are highly anticipated, given his history of M&A success including the takeover of the Macquarie real estate platform along with several of their listed A-REITs in 2010 and the acquisition of Folkestone in 2018.

More recent plays include the delisting in 2021 of the ALE Property Group in a joint venture with Hostplus - with the group taking control of properties including Melbourne’s famed Young & Jackson pub - and in 2022 the delisting of Irongate, with PGGM.

Further M&A is likely. A-REITs recognise that scale is crucial to maintaining appeal for both global and domestic investors. The benefits that can come from becoming bigger include increased access to and a lower cost of capital.

Larger groups often enjoy better visibility, credibility, and investor confidence which is critical when competing for global capital.

They can also generate operating efficiencies and lower costs. M&A can provide an avenue to grow efficiently.

Also if structured correctly, a listed-to-listed acquisition can be cost-effective as no stamp duty is paid on the acquisition of the underlying assets.

At the same time, private real estate funds and sovereign wealth funds, which hold substantial cash reserves and have long-term investment horizons, may look to capitalise on the current discounted pricing of A-REITs and take a few private.

We are already seeing that occur in the US REIT market. Blackstone, the world’s largest institutional investor, recently announced that it would take private-rental housing firm Apartment Income REIT private for $US10bn ($15bn) in cash, including debt. In January, Blackstone announced it would take the NYSE Canadian real estate firm Tricon Residential private for US $3.5bn. An A-REIT IPO is unlikely in 2024 but you never know.

The current difference in the cost of capital between the private and listed market may be a deterrent. For a real estate asset portfolio to successfully go public and flourish, it requires a balanced blend of structure, high-quality assets, scale, and an articulated investment strategy.

Without these elements in place, it runs the risk of replicating the fate of many A-REITs, ultimately losing credibility with investors and being acquired within a few years of listing.

As noted above, A-REITs have demonstrated their ability to adapt and evolve. And that will continue. The A-REIT universe will further diversify away from the traditional dominance of office and retail, serving the evolving needs of a digital and knowledge-driven economy and providing much-needed economic and social infrastructure.

A-REITs with their world-leading transparency and ESG credentials will continue to be attractive to both domestic and global capital.

The next few years promise to be another intriguing chapter for the A-REIT sector.

Adrian Harrington is a senior adviser to Lighthouse Infrastructure and NSW Chair of Housing All Australians