
They call them bond proxies, listed stocks that offer security of income and stability in returns in the manner of bonds. AREITs and infrastructure stocks like Sydney Airport and Transurban are typical of the label, although as investors would be all-too-aware, stability, at least in terms of capital growth, hasn’t been in great supply of late.
After murmurings of a lift in U.S. interest rates and an increase in domestic bond yields which followed, the AREIT sector and other bond proxies plummeted. Since reaching its peak in early August, the ASX AREIT sector has declined by about 14%.
The sell off has been counter intuitive with many low risk, high quality portfolios being sold down excessively.
So, what’s going on and what does it mean for AREIT investors?
The first point to appreciate is that this pull-back has taken place without any erosion in the underlying operating fundamentals within these businesses in particular and the sector as a whole. That means the distribution outlook has not fundamentally changed and investors can continue to look forward to the kind of regular income they have come to expect.
The second point is an extension of the first. The price falls in the sector now mean the yield on offer is more attractive. While the price falls get all the attention, there’s now an opportunity for investors seeking long term, stable income, to secure an additional 0.80% in income above the average FY17 distribution yield available from these companies just a few weeks ago.
Thirdly, this increase has made AREITs, at least in an income sense, not just nominally but also relatively more attractive. The chart below highlights the current distribution yields available across typical investments within the Australian market. Notice the gap between these traditional options and the APN AREIT Fund, currently yielding 6.33% pa1. A fair slice of that gap has been created by recent sector price falls. In our view, especially as the sector has delivered a total return of 17.6% pa over the past three years to 17 October 2016, this is to be welcomed.