A-REITs capitalise on cheaper debt

Australia’s record low interest rates are benefitting the country’s listed property sector.

July 16, 2019

Australia’s record low interest rates are benefitting the country’s listed property sector, with a spate of acquisitions and new capital raisings. 

The Reserve Bank of Australia (RBA) cut the cash rate to a record low of 1 percent on 2 July. While the country’s debt markets had fully priced the drop, Australia’s top 200 listed companies, as well as the broader equity market, surged to all-time highs.

As their shares trade at elevated levels, Australian real estate investment trusts (A-REITs) are taking advantage, circling-in on top-tier commercial real estate assets, in core locations, says Fergal Harris, Head of Debt Capital for JLL Asia Pacific.

“They have cost-effective access to both debt and equity capital markets, which enables them to acquire real estate which is currently offering excellent inflation-protected returns in the context of Australia’s low growth environment,” Harris says.

Investors have responded strongly to the latest round of A-REIT equity issuances being well-subscribed, making it an opportune time to grow their portfolios through acquisition and development, says Harris.

Strong investor demand for growth assets has seen A-REITs raise A$2.1 billion of equity since the beginning of 2019, which is more than the previous two years combined. This reflects the biggest year yet for A-REIT equity issuances since 2010, according to J.P Morgan.

“The current environment, with strong A-REIT share pricing, low cost of debt, and limited availability of tier 1 property assets through the cycle, is conducive to assets being trading as A-REIT’s improve portfolio composition,” says Harris.

He adds that private investors are expected to be equally as acquisitive, encouraged by tenant demand and inflation-protected cash flows.

Meanwhile, commercial real estate in Australia continues to offer returns well above global counterparts, says Rob Sewell, head of Office Investments for JLL Australia.

“Australia’s capital rate spread to bonds, combined with a transparent market and a weaker Aussie dollar, means that international investors continue to support both listed and unlisted property markets in Australia. It is a low-risk capital destination.”

Uncertainty around the retail sector and a scarcity of scalable investment opportunities in logistics means prime office is benefiting from additional demand, adds Sewell.

“This is likely to lead to further capital rate compression for securely-leased prime office assets, which at the moment are hard to find.

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