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Making sense of A-REITs

A-REIT, REIT, real-estate investment trust, property investing, property investor, retail property, concentration risk, active investment, passive investment, VanEck, Morningstar

Real estate investment trusts are a common way for investors to access the property market, but in Australia index-tracking trusts can present investors with unexpected challenges.

Australian real estate investment trusts (A-REITs) have not performed well relative to other parts of the market in 2017, according to asset manager VanEck.

According to the company, one reason for this is because of the narrow nature of the A-REIT sector, which typically gives an edge to passive strategies but can work against these strategies in some markets.

“Sometimes, however, passive strategies throw up unexpected risks, such as concentration, when the fund tracks a market capitalisation index. One such example is the S&P/ASX 200 A-REIT Index,” VanEck said.

This index is heavily weighted towards retail property and A-REITs that track this index are concentrated within retail property, which has not performed well this year.

“Given the concentration in retail REITs in Australia and extended poor performance in the retail sector, the benchmark index has significantly underperformed the overall share market and could continue to do so,” VanEck said.

“Households are struggling with high debt levels and low wages growth, so retail spending is tight. Another headwind is the increasing dominance of online traders, to be amplified when Amazon finally arrives in Australia.”

Before rushing off to find an active A-REIT, however, it’s worth noting that the narrow nature of the sector makes it difficult for active managers to find opportunities to outperform their passive peers, VanEck said.

Data released by research company Morningstar in November last year revealed that 87.5 per cent of active A-REITs were outperformed by their index over a one-year period.

This number increased over longer periods of time, with 93.06 per cent of active A-REITs being outperformed by their index over three years and 92.41 per cent of active A-REITs lagging their index over five years.


Making sense of A-REITs
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