Overview

The ASX 200 AREIT Accumulation index rose by 11.06% over the year ending 30 June 2014.

S&P ASX200 AREIT Accumulation

Outlook

The outlook for key property sectors is as follows:

Office

Data compiled in January 2014 confirm CBD office vacancy rate increases in Sydney (9% of floor space), Brisbane (14.2%) and Perth (9%). Melbourne recorded an improvement (8.7%).

An increased level of new space enquiries since January should help to stabilise vacancy rates although rental growth is likely to remain subdued given the excess supply that needs to be absorbed.

Nevertheless we expect valuations to remain reasonable given investor demand for yield and the developing trend of converting non-performing office space to residential (especially in Sydney and Melbourne).

Retail

Although the recent Federal Budget has dampened consumer momentum, low interest rates and the influx of international brands wanting shopping centre space, remain broadly supportive of the sector.

Industrial

In NSW industrial property supply has outweighed demand since 2010 and so rents have remained relatively unchanged.

Logistics and storage users continue to provide the bulk of demand. New supply is running below long term averages, which is helping to gradually rectify the supply imbalance. Average prime yields of 7.75%+ have attracted investors, which has helped support valuations.

Despite gains in capital values, Melbourne vacancy rates are at their highest since January 2010. Reports in recent months suggest that enquiries for new space are gaining momentum.

Extremely low vacancy rates in the Brisbane market in 2012 prompted a strong supply response over the last 2 years, which has overcompensated for demand. Rents and prices are unlikely to rise while this new supply is absorbed.

Residential

AREITs exposed to residential property and construction have benefited from the low interest rate environment which has supported demand. These positive fundamentals are likely to continue, at least in the short run.

Nevertheless, with interest rates at record lows and household debt near record highs, this recovery is unsustainable over the medium term.

Conclusion

Investor demand for yield has helped support the AREIT sector, driving up valuations despite relatively subdued fundamentals in the office and industrial sectors. While retail and residential remain attractive, these sectors are particularly sensitive to a rise in interest rates and/or a change in consumer confidence. On balance we believe better value lies elsewhere but expect AREITs to remain well supported while interest rates remain low. We recommend investors retain a modest underweight exposure.

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