Performance in Direct Real Estate has softened considerably over the last 12 months and this has been reflected in the overall market, as represented by the MSCI/Mercer Australia Core Wholesale Monthly Property Funds Index, which returned -3.95% over the 12 months to 30 September 2023.

The median manager returned -5.58% with performance ranging from -10.99% to 5.63% across the Zenith rated peer group over the same time period.

Across Direct Property, performance continued to weaken across all sub-sectors as valuations were impacted by higher debt costs. The Industrial sector continued to outperform Office and Retail which face specific headwinds from soft tenant demand, higher vacancies and sluggish rent growth.

It is worth noting that this is only the third time in 30 years that the total returns to Australian direct property have turned negative on a rolling 12-month basis and is the direct result of valuation declines as a consequence of the sharp increases in interest rates over 2022 and 2023.

Real estate – global

Global direct property returns have also been weak over the past year, with the sector facing similar headwinds of higher interest rates and softening valuations.

Performance across the rated peer group ranged from -4.55% to -17.53%, with the median manager returning -8.87% for the 12 months to 30 September 2023.

Similar to Australia, performance in the Industrial and Logistics sector remains elevated in comparison to other subsectors. Peer-relative performance in this sub-sector can also be influenced by movements in currency, with varying levels of hedging applied.


The strong linkage observed between inflation and the underlying earnings of some infrastructure asset types has resulted in resilient performance across many of the underlying assets within this subsector.

While rising discount rates may be a headwind from a valuation perspective, moving forward, the essential nature of infrastructure assets and resilient nature of underlying earnings brings a continued positive outlook for many sectors.

During 2023, Zenith’s rated peer group expanded from two to five participants, however, given the recent inception of three of these funds, performance was not able to be included. Notwithstanding this, the remaining rated sector participants delivered attractive returns of 3.68% and 8.15%.

Frustrations with valuations

The underlying assets in Real Asset investment funds are traded on an occasional basis, even if the listed vehicles that hold them, or similar assets, trade continuously on the stock market.

As a result, at times there can be significant differences between the underlying valuations assigned to the portfolio of assets and the stock market price of the vehicles that hold them.

This is despite both vehicles (listed and unlisted) employing professional valuers to assign values to each underlying portfolio asset on a less frequent basis, typically every six months, but occasionally quarterly.

Forward-looking equity markets will tend to price higher (or lower) than the static valuations placed on portfolios by infrequent valuations, changing much faster than valuers can adjust the value of underlying assets.

As a result, the listed market is often viewed as a leading indicator to the direction of unlisted valuations.

The graph below illustrates the relative performance between the share prices and portfolio valuations of six Real Estate Investment Trusts (REITs) listed on the ASX.

The REITs chosen represent externally managed property portfolios that best represent pure property portfolios, that is without the influence of associated manager businesses, such as funds management or development activity which tends to contaminate the
relationship between listed and unlisted portfolio valuations.

The lagged impact

Prior to 2020, the listed market allocated a premium to underlying portfolios, as low interest rates and a relatively healthy economic environment supported valuation growth in the commercial property market.

The covid pandemic saw a significant reversal in sentiment, with equity prices falling substantially, turning a 30% premium into a 25% discount in relative valuations. Despite this, there was minimal impact on the assessed valuations of the actual property assets.

The rapid downturn was promptly followed by a rapid recovery, again, with minimal movement in actual portfolio values, illustrating volatility in the equity market and the tendency of short-term sentiment to over or under-shoot what ultimately eventuates.

The downturn in relative pricing of listed and unlisted valuations that began in late 2021 appears to have a greater relationship with the realities of asset pricing mechanics.

As interest rates have increased, higher discount rates result in lower valuations of income producing assets.

Hence, the share prices of our selection of REITs have fallen from a 14% premium to asset values in December 2021 to a -30% discount as at the end of November 2023, illustrating the lagged impact of unlisted valuations when there are genuine market dislocations and thin transaction activity.

REITs V unlisted

A logical conclusion to the current discount of REIT share prices to their assessed NTA is that either REITs are undervalued, or that unlisted portfolios are overvalued.

The reality is likely to be a combination of both, with asset valuations dependent on where long-term interest rates settle.

There is little doubt that commercial property values are softening and this is likely to continue.

Notwithstanding this, for unlisted investment vehicles that are moderately leveraged, not facing critical redemptions and are not forced sellers, it appears unlikely that portfolio valuations will fall by the 25% to 30% necessary to realign NTA’s with current share

Zenith would anticipate that once longer-term interest rates stabilise, REIT prices should improve, closing the share price to NTA gap from both directions.