Thank you, Mr Bond (market)

Source: UBS Research, Company Announcements, Bloomberg, APN Property Group – 17 November 2016

Over the past 12 months these results show that key sector metrics are either stable or improving (the blue and black lines). And yet while earnings, distributions and net tangible assets (NTA) are rising, stock prices are falling (the red line). What’s going on?

If interest rates were actually rising, the share price decline might have some justification. Rising interest rates can directly affect a property trust’s net earnings (due to higher interest expenses). But rates aren’t rising in Australia and there’s not much evidence that they will for quite some time. So the income from property trusts is not under threat. However, rising bond rates can affect the investment market’s assessment of capitalisation rates, which has an impact on valuations.

Domestic interest rates are at historically low levels with no discernible catalyst for a rise. According to Bloomberg, 34 global economists arrived at a median forecast for the RBA cash rate of 1.25% by December 2017. That would be a new historic low. Eventually, rates will increase but the recent reaction in the local bond market looks like another false start.

It does, however, create an opportunity for genuine, income-focussed investors. Just three months ago APN’s AREIT Fund was yielding 5.56% pa (as at 1 August 2016)¹. Now that figure has increased to 6.45% pa (as at 28 November 2016), and we have Mr Bond Market to thank for it.

The recent quarterly updates from Australia’s biggest property trusts should provide income investors with confidence. Operationally, the sector is travelling well. And, with domestic interest rates expected to test new historical lows, the secure, sustainable and transparent nature of AREIT distributions looks more attractive now than it did three months ago.

This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for Review, our monthly email newsletter.

1. As at 31 October 2016. Current running yield is calculated daily by dividing the annualised distribution rate by the latest entry unit price. Distributions may include a capital gains component. Past performance is not an indicator of future returns.