Rise of the specialised AREIT
From childcare to healthcare, data and pubs - property investors have a wider choice of new niche trusts via ASX.
The Australian Real Estate Investment Trust (AREIT) sector has experienced a strong recovery since the Global Financial Crisis, with not only growth in the more traditional diversified real estate investment trusts such as Dexus Property Group, Stockland Corporation and GPT, but also the birth of specialised or niche trusts.
There are the traditional specialised areas such as Office (e.g. Investa Office Fund), Retail (Westfield Corporation and Scentre Group), and Industrial (Goodman Group). But there are now many interesting specialist sectors an investor can consider.
The attributes of these more specialised vehicles typically include most of the following:
- Smaller size and they often start with a market capitalisation of less than $500 million. This is to be expected with niche property areas.
- The property asset sizes themselves are smaller. Not the $100-million shiny office towers, but assets as small as $1 million to $10 million. As a result, some can be more expensive to manage, but the benefit is they are much easier to sell if an AREIT needs to raise money. They also tend to have slightly higher income yields.
- They will normally invest in one or two specialist areas that reflect the expertise of the founding management.
- Many of these areas have higher long-term growth potential than the more traditional asset classes, and reflect long-term demographic trends such as ageing and outsourcing.
- They will often have new issues especially early in their life as they acquire new assets and look to broaden their unitholder base.
- Often these emerging property areas are in the process of consolidation, the AREITs looking to capitalise on improvement in property values that comes from the gradual institutionalisation of the respective niche asset class.
- Tenant risk can be higher in these specialist areas. Some AREITs have one or two tenants that dominate, and this is something the investor needs to take into account.
Let's look at some of these new asset classes and the AREITs and property companies that are in each of these sectors:
Childcare and early learning
This has largely been an asset class with very diverse ownership, but in recent years there have been large institutional buyers buying and developing large numbers of smaller properties, and gradually making the asset class more professionally run. Arena REIT and Folkestone Education Trust have been active in this area.
The advent of cloud computing is a long-term trend and assets that specialise in this area are expensive to build and operate, and require very experienced management. One AREIT that specialises in this area is Asia Pacific Data Centre Group. This REIT sector is mainstream in the US but in its infancy in Australia, and therefore tenant risks and the purpose-built nature of the assets are issues to consider.
AREITs that invest in hospitals and medical centres are all experiencing very favourable demographic tailwinds as demand increases in our ageing population. Generation Healthcare is in the sector and Arena REIT is now also moving into this asset class. Key attractions for investors in the sector are the typically long leases and stable tenants.
Retirement communities, aged-care and other seniors living
Along with healthcare, one of the key long-term demographic trends is the requirement of the ageing population for more professionally run and/or higher-quality accommodation. This has traditionally been an asset class with a very large number of small-scale operators, and over the past few years has started to consolidate and become much more professionally run. Aveo Group, Ingenia Communities Group and Stockland Corporation all have exposure to this area.
Residential land and property development
Affordable accommodation is a critical factor in Australia, especially for first-home buyers. Peet Limited, Stockland Corporation, Mirvac Group, Villa World and Cedar Woods Properties all have exposure to this asset class.
Traditionally the bailiwick of smaller operators who might own one or two pubs, there has been widespread rationalisation in this asset class and there are two specialist AREITs: ALE Property Group owns 87 pubs predominantly leased to a joint venture involving Woolworths, and Hotel Property Investments owns a portfolio of 48 properties predominantly leased to a subsidiary of Coles.
There is an AREIT that offers investors the opportunity to invest in agricultural land that is leased on long leases to specialist operators of almond orchards, poultry and vineyards. Rural Funds Group listed in 2014 and has in excess of 25 properties in NSW, Victoria and South Australia.
Metropolitan office assets
These are generally smaller office assets located in suburbs and usually offer a higher yield than CBD office properties. However, they generally have lower rent and capital growth over time, and can be more volatile because there are fewer tenants for any specific suburb than the CBD and the buildings are smaller. There are two AREITs that offer exposure to this sector: Centuria Metro REIT and GPT Metro Office Fund.
Another long-term trend is a function of more expensive housing and the move towards smaller residential accommodation. There is an increasing need for self-storage offsite, and National Storage REIT is capitalising on the trend with more than 60 storage centres located across Australia in key metropolitan centres. It is looking to participate in the rationalisation of this sector, buying more assets and branding them under the well-known National Storage banner. In addition, Abacus Property Group has a meaningful exposure to this area.
Understand the risks
Finally, a word of caution. Although there are favorable tailwinds for many of these sectors and therefore for the AREITs and property companies we have mentioned, it is still very important to research carefully their valuations and fundamentals. They can be overpriced or underpriced.
Look closely at tenant risk, the purpose-built nature of the assets, the prospects of any higher and better use of those assets, diversification of the portfolios, the capital structures (especially gearing), the length of the leases and all the other traditional property assessment measures.
Remember, there is no point investing in an AREIT that is in a sector with great long-term tailwinds if it is at too high a price or has a poor capital structure. You may well still lose money as a result.
About the author
Stephen Hiscock is Managing Director of SG Hiscock & Company, a boutique fund manager specialising in Australian equities and real estate, with approximately $2.3 billion in funds under management. He jointly manages the AREIT portfolios with Grant Berry.
SG Hiscock & Company is a foundation member of is a foundation member of the ASX mFund Settlement Service. The mFund Settlement Service enables you to buy and sell units in selected unlisted managed funds directly with the mFund issuer via a stockbroker or advisory services used to transact shares or other ASX products.