REITS TO
ACKNOWLEDGEMENTS
EDITOR IN CHIEF: Samuel Yu
EXECUTIVE CONTENT
EDITORS: David Wang, Jungwoo Lee
EXECUTIVE DESIGN EDITORS: Ivy Tan, Caithlyn Kusuma
AUTHORS: Aman Madhyastha, Richard Ly, Clarisse Tsang, Brandon Lam, William Tsui, Aryan Desai, Landrie Zuo
DESIGNERS: Anneka Cai, Serena Chui, Rama Mahadik, Aryan Desai, Anna Lee
DISCLAIMER
1. The information in this free guide is provided for the purpose of education and intended to be of a factual and objective nature only REISA makes no recommendations or opinions about any particular financial product or class thereof.
2. REISA has monitored the quality of the information provided in this guide. However, REISA does not make any representations or warranty about their accuracy, reliability, currency of completeness of any material in this guide
3 Whilst REISA has made the effort to ensure the information in this guide was accurate and up to date at the time of the publication of this guide, you should exercise your own independent skill, judgement and research before relying on it. This guide is not a substitute for independent professional advice and you should obtain any appropriate professional advice relevant to your particular circumstances.
4. References to other organisations are provided for your convenience. REISA makes no endorsements of these organisations or any other associated organisation, product or service.
5. In some cases, the information in this guide may incorporate or summarise views, standards or recommendations of third parties or comprise material contributed by third parties (“third party material”). Such third party material is assembled in good faith, but does not necessarily reflect the views of REISA REISA makes no representations or warranties about the accuracy, reliability, currency or completeness of any third party material.
6 REISA takes no responsibility for any loss resulting from any action taken or reliance made by you on any information in this guide (including without limitation, third party material).
HOWDOREITSEARNINCOME?
REITs generate income mainly through two avenues: (1) rental income and (2) sale proceeds.
Firstly, REITs generate recurring income by leasing out property to tenants and collecting rent. For example, a tall office building in the Sydney CBD may be owned and operated by a REIT such as Charter Hall which is then leased out to firms that choose to have an office in the city centre. The REIT receives regular rental income from each office tenant for the duration of the lease.
Secondly, REITs earn income from the sale of property For example, if a REIT acquired an industrial warehouse for $20 million and sold the property for $25 million 5 years later, the REIT would make a $5 million gain on sale of the investment. These sale proceeds are used to acquire other real estate assets, fund development projects or distribute greater dividends to its shareholders.
APRACTICALEXAMPLE
Consider you want to buy an industrial warehouse but it is too expensive. Instead of only youself paying for the property, you and nine other friends pitch in an equal amount of money each. Now you all own the warehouse together. After leasing out the space to a tenant, the warehouse earns rent of which you and your friends each receive one-tenth, like earning regular pocket money from the investment. When you and your friends eventually decide to sell the property five years later, you and your friends each receive one-tenth of the total sale price.
REITs operate under the same principle but on a much larger scale There is a larger pool of money, raised from a larger number of investors and used to invest in a larger number of properties. By investing in a share of the REIT, investors receive a share of the regular dividends distributed by the REIT which come from regular rental income from leasing out property and proceeds from the sale of property.
WHATAREASX-LISTEDREITS?
REITs can either be public or private. Private REITs are only accessible to institutional or high net worth investors, usually requiring a large minimum investment amount ($50,000+). On the other hand, public REITs trade their shares on market exchanges like the ASX for Australian REITs, meaning they are openly accessible for retail investors like yourselves.
Contrary to other stocks listed on the ASX, REITs are required to distribute at least 90% of their taxable income as dividends to shareholders to qualify for corporate tax exemption. In addition to the potential capital gain from the increase in share price, this reliable dividend payout structure is highly attractive to income-oriented investors.
This report focuses on ASX-listed REITs.
02 COREREAL ESTATESECTORS
The real estate sector is subdivided into core sectors (office, retail and industrial) and alternative real estate sectors (living, infra-lite and social infrastructure). While some REITs are pure-plays, meaning they only invest in a particular sector, other REITs may be diversified across multiple sectors such as Mirvac Group, Charter Hall and Stockland.
In the core sectors, operations primarily involve a landlord renting out property to tenants where the landlord's income is based on rent collection. On the other
The office sector includes buildings used as an office or workspace, including premium-grade office towers in the CBD, suburban office parks and mixed-use developments with office components. Driven by economic activity and evolving work environments, the office sector faced structural headwinds during and after the pandemic due to the normalisation of remote and hybrid working models.
TAILWINDS OFFICE
Return to Office
Australia has recently seen employers increasingly move towards fiveday office mandates to improve productivity and workplace culture.
According to JLL research, offices across capital city CBDs absorbed a net 163,500 sqm over 2024, a record high since 2018.
Flight to Quality
With hybrid working now common, employers are focusing more on the experience for workers who attend the office. This has seen tenants pay higher rents for a smaller space in higher quality, well-located and sustainable offices with ample amenities.
Minimal Supply Pipeline
According to Dexus, the supply pipeline has significantly contracted with forecast commencements for the next three years down 33% compared to the five-year average. This protects existing stock from additional supply risk and supports rent growth through the cycle.
HEADWINDS&RISKS
High Incentives
According to CBRE, Australia CBD prime office tenant incentives have increased from 27% of net face rents in early 2020 to a record high 40% as at September 2024. This was primarily due to a rise in office vacancy rates forcing landlords to offer more attractive deals like rent-free periods, tenant improvement allowances, and other concessions to attract and retain tenants but are detrimental to investment returns.
Flexible Lease Terms
Similar to incentives, landlords have been forced to offer shorter lease terms or options to break the lease early to attract tenants. This results in greater tenancy turnover risk and a shorter weighted average lease expiry (“WALE”).
Large Capital Expenditure
Given the flight to quality trend, many landlords have increased capex spend to improve the quality of office buildings. This has resulted in many office investments generating lower returns than expected as capex reduces free cash flow.
TOP5OFFICEEXPOSURES
RETAIL
The retail sector includes any real estate used to facilitate the sale of goods and services to customers, commonly shopping centres. This sector performs well in strong economic environments where there is strong wage growth, driving positive consumer sentiment and higher levels of household discretionary spending, which in turn drives demand for retail space.
TAILWINDS
Strong Labour Market
Real wages grew 0.7% through the year to the September quarter in 2024, the strongest rate of real wage growth in four years. Further, the introduction of tax cuts from 1 July 2024 has significantly boosted aftertax household income. The unemployment rate remains tight at 4.0% as at December 2024 which also supports a level of household spending.
Population Growth
Deloitte forecasts 13% national population growth from 2024 to 2033 primarily from migration. This is expected to drive substantial demand for retail in Australia by boosting foot traffic and retail expenditure.
Lack of New Supply
A lack of new shopping centre supply is another tailwind, particularly given population growth is adding to aggregate demand. The supply of enclosed shopping centre space projected over the next two years is only around 70% of the 20-year average according to Dexus.
Growth in E-Commerce
Fuelled by the pandemic, e-commerce has accelerated in Australia reaching 14% penetration of total retail sales, a 60% increase since 2020, reducing demand for brick-and-mortar stores Despite shopping centres investing in more ‘experience’ based tenants such as arcades or cinemas to buoy foot traffic, this remains a structural challenge for retail.
High Cost of Living Pressures
In response to continued inflationary pressures, the RBA has held the cash rate at 4.35%, a record high since December 2011. Despite rising incomes in a stable labour market (see above), higher mortgage rates and cost inflation have placed downward pressure on household discretionary spending.
TOP5RETAILEXPOSURES
INDUSTRIAL
The industrial sector includes real estate that supports manufacturing, storage, distribution or logistics operations such as warehouses, fulfilment centres and cold storage facilities Premium industrial assets are strategically located to optimise the flow of goods, typically in industrial zones near major transport hubs such as airports, shipping ports or highways. This sector is often seen as more resilient to economic downturns than office and retail.
TAILWINDS
Growth in E-Commerce
The rise of e-commerce since the pandemic (see Retail) and need for faster turnaround on delivery times have increased the demand for last-mile logistics, which are those warehouses in prime locations that enable rapid order fulfilment.
Manufacturing Industry Demand
According to KPMG, fuelled by the pandemic and ongoing geopolitical events, the manufacturing industry is navigating supply chain and shipping delays in conjunction with growing transport and raw material costs. This has increased demand for industrial property as manufacturers shift towards the onshoring of operations domestically.
Tapering Rent Growth
The industrial sector has boomed in the past two years, seeing unprecedented rent growth and incredibly low vacancies. However, this growth has slowly eased over the past few quarters as vacancy rates have begun to move upwards to 1.9% as at 1H24 and gross take-up in 2024 lower than the 10-year average of 3 million sqm.
Large Supply Pipeline
Australia’s logistics supply pipeline is currently at a record high with 3.8 million sqm expected to be delivered in 2025 according to Colliers. Further, CBRE provides that the national gross take-up YTD totalled 1.7 million sqm as at 2Q24 which is significantly lower than the 10-year average of 3 million sqm Alongside weaker leasing activity in 2024, these are likely indicators of supply catching up to demand
TOP5INDUSTRIALEXPOSURES
03 ALTERNATIVEREAL ESTATESECTORS
As mentioned earlier, alternative real estate sectors are considered ‘alternative’ as they have a more complex operational aspect to the investment and require greater active management compared to the core real estate sector assets.
Alternative real estate can be divided into three broad categories - living, infralite and social infrastructure. This report explores only the key sub-sectors of each alternative real estate category that sit within the investment portfolios of the top ASX-listed REITs.
Contrary to traditional residential property which are owner-occupied like the houses that you live in, the living sector refers to residential assets that are institutionally owned and operated. The living sector addresses affordability challenges in home ownership particularly given the recently high interest rate environment as well as the lack of housing supply and need for urbanisation exacerbated by Australia’s growing population.
BUILD-TO-RENT(“BTR”) LIVING
BTR refers to a real estate asset class where a developer constructs a property specifically to lease out to tenants rather than for sale. This means the property remains owned and managed by a single institution for long-term rental purposes, often with features like on-site amenities and professional management services
The BTR market in Australia is still nascent compared to the UK and US, with challenges related to planning regulations and local community acceptance. However, recognising BTR as a solution to alleviate housing affordability issues by providing more quality rental options, the Australian government has implemented supportive policy such as tax concessions for foreign investors to encourage growth in the sector Although supported by strong tailwinds such as a growing population, high construction costs in an inflationary environment has hindered development and further investment from institutions.
STUDENTHOUSING
The student housing sector refers to property that provides rental housing for university and college students and are typically located near higher education institutions. These properties offer living spaces for students typically with communal amenities, study areas and easy access to campus facilities.
Australia recorded over 1 million international student enrollments in 2024, an increase of 16% from before the pandemic This represents a strong tailwind to student housing as foreign students constitute a significant proportion of the sector’s tenant base. However, reforms to migration policy such as stringent eligibility requirements and international student caps have created uncertainty around the sustainability of demand growth in this sector.
REITSWITHSTUDENTHOUSINGEXPOSURE
RETIREMENT
The retirement sector refers to retirement villages which are housing developments for retirees over 55 years old who are seeking independent living These villages offer communal amenities such as swimming pools, gyms and gardens, creating a ‘village’ feel and a strong sense of community.
Australia’s ageing population profile is a key tailwind for the sector. However, contrary to the attractive stable cash flows of typical real estate, the deferred management fee structure of the retirement village model has deterred new entrants to the sector Further, Australia is facing a shortage of aged care workers with ABS estimates suggesting a shortfall of at least 110,000 direct care workers by 2030. This places material upwards pressure on operational cost.
LANDLEASE
Often referred to as ‘the alternative to retirement villages’, land lease is a housing model that also targets the over 55s market but occupiers only own their home and not the land. While this means that occupiers avoid stamp duty upon acquisition, they must pay rent on the land to the operator.
A key pull-factor for land lease is the large component of regular cash flows from the rent on the land compared to the irregularity of the deferred management fee structure in retirement villages However, developing land lease communities often involves navigating complex zoning laws and regulatory frameworks which can impede expansion and make it difficult to scale operations.
INFRA-LITE
The infra-lite sector includes assets that sit near the boundary of infrastructure and traditional real estate such as data centres, self-storage, life sciences (laboratories and research facilities) and renewables (solar and wind farms). This category is a ‘light’ form of infrastructure due to low asset value concentration, a lower level of public usage and limited government regulation compared to core infrastructure such as toll roads and airports.
DATACENTRES
Data centres are specialised real estate assets designed to house computer servers and related hardware that store, process and distribute a company’s digital data. With the recent growth in the demand for AI, digitisation and cloud computing, major hyperscalers such as Amazon, Microsoft, Google and Meta have significantly contributed to data centre demand to support their services
With Australia ranking 5th globally for data centre build-out capacity according to CBRE, the investable universe of Australia’s data centre sector is expected to double to $40 billion over the next four years. However, there remains great uncertainty surrounding the future of AI. This was observed when Deepseek, a Chinese start-up, recently announced a cheaper and more energy-efficient AI chatbot that would require less data storage and cooling solutions, suggesting an overestimate of the future demand for data centres.
SELF-STORAGE
The self storage sector refers to storage space leased out to individuals and businesses for personal items, business inventory, seasonal equipment and vehicles. Storage space can be in the form of rooms, lockers, shipping containers or outdoor space The sector has a more dynamic operating model compared to traditional real estate as rental periods are typically shorter
Rising trends of apartment living and remote working practices continue to drive excess storage requirements. Further, the dynamic operating model allows investors to adjust rents more regularly with the ability to reduce rents to retain occupancy in downturns and take advantage of demand bursts during upswings However, there are hidden costs associated with operating a self storage facility including mandatory insurance fees for renters, unexpected maintenance costs and costs related to abandoned property.
SOCIALINFRASTRUCTURE
The social infrastructure sector includes assets that support the well-being and quality of life of communities including healthcare, childcare and hospitality. The sector is backed by continuous government policy reforms that respond to growing public expectations for improved access and higher quality of these essential services.
HEALTHCARE
The healthcare sector includes property used to provide medical services such as hospitals, medical centres and doctor clinics. These assets have stringent fit-out requirements that must accommodate high grade sanitation, specialised healthcare equipment and patient-friendly spaces.
Australia’s ageing population underpins stable structural growth in demand for healthcare property. Furthermore, given healthcare is a non-discretionary expense, healthcare real estate is more inelastic to economic downturns compared to other real estate sectors. On the other hand, healthcare comes with additional bespoke risks as doctors become the forefront of operational and financial strategy.
CHILDCARE
The childcare sector includes property that provide education and general care to young children such as childcare centres and early learning centres These centres typically include both indoor and outdoor playing areas, learning spaces and safety features that must follow strict compliance standards such that the property is suitable for children.
The increasing female workforce participation in Australia alongside favourable government subsidies drive strong fundamental growth within the childcare sector Similar to healthcare, childcare is a non-discretionary expense and therefore is also considered an ‘all-weather’ asset class. However, the trade-off between profitability and providing the highest quality care for children deters some institutions from allocating capital to the sector.
REITSWITHCHILDCAREEXPOSURE
04 CONCLUSION
REITs offer investors an accessible way to gain exposure to real estate without the complexities of direct property ownership. They provide steady income and growth potential but come with market risks. Investors should assess their risk tolerance and research carefully With the right approach, REITs can be a valuable addition to a diversified portfolio!
HOWCANILEARNMOREABOUTREITS?
As part of the REIT Deep DIve Series, REISA will release a publication each month that covers a particular REIT on the ASX 200.
Next month’s publication will cover Goodman Group (ASX:GMG), a REIT that has seen tremendous share price growth over the past years given its success in industrial property and growing investment in data centres.
TOP25ASX-LISTEDREITS⁽¹⁾
