Rising retail asset confidence in June quarter accelerates unlisted and direct property returns, 12-month public markets turnaround drives strong listed asset performance

Australia’s return to retail stability and sustained confidence in industrial assets in the second quarter of 2021 have led to stronger 12-month returns for unlisted property assets and an impressive turnaround for direct property.

In the three-months ending 30 June 2021, unlisted property returns outperformed both A-REITs and Australian equities, according to data released by Zenith Investment Partners, Australian Unity, MSCI, the Property Funds Association and the Property Council of Australia.

Due to the growth of unlisted property funds in the second quarter, 12-month returns improved and stood at 18.7 per cent, with performance underpinned by tightening capitalisation rates and recovering rental incomes for COVID-impacted assets.

The quarter also saw 12-month overall direct property investment returns strengthen from a narrow 1.7 per cent at 31 March to 7.8 per cent at 30 June 2021. During this time, income returns also increased from 4.6% to 5.0%. Capital growth has been a significant driver of overall returns for direct property, led by increased confidence in both industrial and retail assets.

Over a 12-month period to 30 June 2021, A-REITS continued to deliver the highest 12-month returns of property assets with 28.4 per cent, with performance supported by a strong public markets turnaround. This placed A-REITs on-par with Australian equities at 28.8 per cent. Across investment types, these returns were only surpassed by global equities at 39.2 per cent.

Dan Cave, Senior Investment Analyst, Zenith Investment Partners, said that figures from the latest quarter have given investors the full picture of how Australian property has fared in our first full financial year affected by the pandemic.

“Despite challenges in early FY2021, it is pleasing to see an impressive recovery across listed, unlisted and direct property, against a backdrop of GDP growth, lower unemployment, climbing vaccinations and retail confidence returning.” Mr Cave said.

“Driven by an impressive turnaround in public markets in the last 12 months, listed property has delivered some of the sector’s highest returns, matching that of domestic equities. This is a clear sign of returning investor confidence.

“Although growth in A-REITs tapered off slightly in the latest quarter, we are very encouraged to see unlisted and direct property growth accelerated at this time. These have been segments where subdued COVID-19 trading conditions have impacted growth in some sectors. Their recovery reflects an improving retail trading environment when out of lockdown, as well as increased rent collection certainty and rising transactional market confidence.”

Australian Unity portfolio manager REITS Damian Diamantopoulos said that the latest market performance reflects solid capital growth returns, but there are still plenty of income opportunities for investors.

“On the whole, direct property total returns remain largely underpinned by asset-produced income. Industrial property is the clear exception, where returns have been strongly influenced by the weight of capital chasing these assets. When we look at the way industrial property has staunchly fended off the pandemic, it’s easy to see why capital growth has been significant,” he said.

“It is pleasing to see overall retail sector confidence improving, with supermarket-anchored shopping centres in particular experiencing stronger investment demand. Despite this, investors must be mindful that certain retail assets continue to recover at a slower rate. Many CBD retail assets are still experiencing subdued trading due to reduced tourism and work from home orders.

“With the pandemic having tested the status quo, alternative sectors have gained prominence. Investor appetite towards data centres, self-storage, service stations, childcare, hospitals and other forms of social infrastructure property has increased.

“For property investors in this environment, it pays to have a diversified approach, not just by sector but through a range of asset classes including direct property, unlisted property trusts, and A-REITs. A diversified approach enables investors to gain exposure to a breadth of relatively resilient income-generating assets, whilst offsetting risk and holding true to their convictions on high quality assets experiencing slower short-term recovery.”