2011 AREIT sector outlook

1 March 2011

We expect 2011 will be a continuation of the healing process. After a tumultuous period for equity markets and the AREIT sector in particular, normality is returning and financial markets are now on a more sustainable footing. The following article summarises APN’s view on the 2011 outlook, as we look forward to another year of AREITs behaving in their traditional style – relatively low risk and income focused.


In Australia we anticipate the strong domestic economy and low unemployment will contribute to perhaps a couple more 0.25% rate hikes by the Reserve Bank of Australia that will ultimately impact the broader economy. Modest consumer price index (CPI) data may be short-lived as flood capital expenditure puts pressure on prices. Critically, given we see unemployment as a key variable for all property markets (either directly or indirectly) and we do not expect a spike over 2011, we foresee broad support for Australian property.

Other economies (relevant to the AREIT sector) are set for more protracted recoveries. The United States is expected to take a few years to recover. We expect unemployment to retreat slowly but with sustained pressure on households (via a weak housing market initially and potentially from higher taxes as fiscal responsibilities become real) the broader economy is going to battle long-term headwinds.

The European region is likely to remain weak through 2011 with Germany the only bright spot. Asia should remain strong, albeit China could be a risk should domestic activity dampen. Japan is expected to continue its steady growth pattern but with demographic and structural impediments remaining a headwind.

In the lead up to the Global Financial Crisis (GFC), the property bull market induced many to pay excessive prices for secondary grade assets. When the GFC hit, buyers re-evaluated their bullish assessments of these assets resulting in dramatic valuation downgrades. In the key property sectors we expect long term pricing relativities between prime and secondary quality assets will continue to normalise.

Office markets will be stable with signs of improvement in most metrics and the outlook for the majority of markets. Low vacancy rates should be maintained with little prospect of new supply materially impacting rents. Strong investment demand from local buyers (and to a lesser extent, those from offshore) will underpin capital values.

Retail property will be supported by steady consumer confidence (in spite of possible rate hikes) with resultant vacancy rates remaining low, thereby supporting net income from assets. Values will likely increase for prime assets but secondary assets may come under pressure as sales activity creates an excess of purchase opportunities.

High levels of inventories and steady gross domestic product (GDP) growth are supportive to the industrial sector. We expect steady to lower capitalisation rates and possible rent increases for prime assets. Similar to the office markets, the low level of supply of new accommodation remains the key structural positive for most industrial markets.

The AREIT market is expected to provide a total return of 8.0% to 11.0% over the calendar year. With the market yield of (circa) 6.0%, our thesis is that capital growth will be in the order of 2.0% to 5.0% over 2011. This result is dependent upon AREITs moving to higher payout ratios, no deterioration in broad economic fundamentals and modest earnings per share (EPS) growth across the sector. Most importantly, we expect 2011 to see a continuation of the trend toward lower risk strategies (reduced offshore investment and corporate earnings) and lower volatility in the AREIT sector.

This article was sourced from http://www.apnfm.com.au/apn/news/?wnGUID=a5168317-5732-4c2e-be9b-080651f9280c

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