Who would have thought it? In the 2020 financial year, the ASX300 fell 7.6% while the ASX 300 AREIT index crashed 20.7%. Much of the last calendar year was spent discussing whether office and retail REITs had a future at all.
The recent end to the 2021 financial year answers that question unambiguously. Whilst the ASX300 rose 28.5%, the ASX300 AREIT index posted a staggering gain of 33.2%.
This was the best return in over 30 years for equities (20+ years for AREIT) investors and just reward for those who toughed it out or were brave enough to recognise the fear-driven opportunity amidst a global pandemic. This is a great result for investors in the APN AREIT Fund, especially after such a tough 2020.
But there’s a bigger message beyond the headline numbers.
Over the past two decades, AREITs have returned an average 9.4% p.a. whilst Australian equities have returned 9.2% p.a. The figures may be similar, but the composition of their returns is starkly different.
AREITs delivered an average distribution yield of 6.8% p.a. over the period while equities yielded 4.6% p.a. Over 70% of the total return from AREITs over the past 20 years came from income, primarily sourced from rent. In equities, there was an even split between income and share price growth the latter of which we all know is far from predictable.
If you want consistency in your returns, the sign is pointing in only one direction. Income is a far more reliable component of the total return from AREITs than equities.
This is primarily due to the lease contract, a legal agreement requiring the tenant to pay a contracted amount of rent which increases annually, for a stated term (usually around five years) to the landlord. AREITs can therefore forecast their rents accurately which provides the basis for paying relatively predictable distributions to their investors.
Another metric offers more support to the return consistency argument. The global financial crisis and Covid dealt AREITs a harsh blow, accounting for three of the four negative return years over the past two decades.
Equities have experienced six such years over the same period. Not only are returns more consistent among AREITs, but with a 12% lower beta, they are also less volatile.