An Australian real estate investment trust (A-REIT) is a unitised portfolio of property assets, often listed on a stock exchange such as the Australian Securities Exchange (ASX). Such investment structures were known as listed property trusts (LPT) in Australia until February 2008, but were renamed to be more consistent with international terms.[1] Unit trusts of property assets which are not listed on a stock exchange are known as unlisted property trusts.
An A-REIT usually owns a portfolio of large properties, which, due to their size and value, cannot be bought by the average private investor. Thus, these large investments are broken up into units of smaller value that can be purchased by private investors, who become unit holders.
LPTs first emerged in the Australian sharemarket in the early 1970s. Around this time they were viewed as a substitute for direct property investing, with enhanced liquidity offered as they were listed. Despite a slow start, the LPT sector has grown rapidly. From less than $5 billion in the early 1990s, the sector reached a market capitalisation of $43.8 billion in August 2002.
As of July 2012 the Australian public real estate sector consists of a total market capitalization of almost €72 billion, accounting for 9.36% of the global real estate investment trust (REIT) market capitalization.[2]
The current top five A-REIT managers are Westfield Group[3] with a market capitalization of €19 billion, Westfield Retail with a market capitalization of €7.8 billion, Stockland[4] with a market capitalization of €6.3 billion, GPT Group[5] with a market capitalization of €5.2 billion and the Goodman Group[6] with a market capitalization of €5.1 billion.[2]
The first REIT in Australia was the General Property Trust – a listed property trust started in 1971. By the mid 1990s, the marker had grown to a capitalization of A$7 billion. In the late 1990s, the market exploded and by 2002 market capitalization had reached A$43 billion. In 2007, there were 69 REITs and by 2012 their market capitalization had grown to nearly A$90 billion.
Unit holders trade on an open market and the value of the unit price is determined by demand and supply. A-REITs are normally listed on the Australian Stock Exchange (ASX). The Bendigo Stock Exchange, the Newcastle Stock Exchange, and the Australia Pacific Exchange are also capable of hosting trusts. A-REITs are a form of listed investment company (LIC) and are considered as such by the ASX. Any A-REIT listed on the ASX has to conform to the reporting standards set out by the ASX.
As of July 2012 there were 45 Australian publicly listed real estate companies of which 13 were included in the EPRA index, published by the European Public Real Estate Association (EPRA).[2]
The income from A-REITs comes primarily from rent. Rents are usually quoted on a dollar per square metre basis. In contrast to residential rents, which are well regulated, in commercial leases there are differing types of rentals or leases.
Many buildings are purchased as going concerns and come ready-stocked with tenants, while some A-REITs are also involved in development. Accumulated rents are the gross income of an A-REIT. From this there are a number of expenses that reduce the gross income to a net income such as management and maintenance expenses, interest, land tax, etc.
Other sources of income include naming or signage rights, roof space for telecommunication companies, and car parking rental.
Property trusts must distribute at least 90 percent of their income back to the unit holders. The balance of any monies that are not distributed are held as retained earnings, which are then used to smooth earnings and distributions in future years.
A-REITs can hold either domestic or international property assets. Outside of Australia, the main countries in which A-REITs hold assets are the United States, New Zealand, and the United Kingdom.
Net tangible assets (NTA) is the balance sheet value of the underlying properties in an A-REIT. It has long been regarded as an important measure of the true value of an A-REIT. A-REITs that trade above their NTA were for a long time considered to be overvalued. Conversely, if the A-REIT traded at a discount to its NTA, it was considered to be trading at a discount to the realisable value of its underlying assets. As a result, in the past most A-REITs tended to trade at close to their NTA over the long-term average.
One of the main benefits of an A-REIT is that it can offer investors a good degree of diversification.
Tenant diversity offers a spread of income risk for an A-REIT. As rent is the primary source of income for an A-REIT, the greater the number and type of tenant, the lower the risk to the income of an A-REIT resulting from tenant default.
Geographic diversification offers A-REITs exposure to differing local economies. It means having assets in more than one State and within States, by being diversified between state regions. Geographic diversification is sometimes across national borders as well.
Diversification by property asset class is also of benefit. The asset classes are those covering office, industrial, retail and also hotel and leisure. It helps to spread the risk in a portfolio as the property value cycles are driven by different underlying economic fundamentals in each sector.
The day-to-day management of the properties owned by an A-REIT are generally contracted out to professional property managers.
Management of the asset is usually tendered for on a regular basis. This is considerably desirable for A-REITs as it helps to keep the property managers diligent if they think that they may lose their management rights.