Australian interest rate movements and A-REITs performance: A sectoral analysis

With interest rates at an all-time low in Australia, investment managers are quickly adjusting tact and constantly seeking feed to maximise return. Many have traditionally resorted to the Australian real estate investment trusts (A-REITs) as a means to growing return. A-REITs are listed property investment vehicles that constitutes around A$125 billion (10%) of the total Australian share market value. The A-REITs have been popular for yielding some of the best returns until 2009, when the global financial market collapse led to 70% fall in value from a peak of A$148 billion. A-REITs with higher debt levels were significantly affected which lead to the collapse and recapitalisation of several leading A-REITs. Since the GFC, with low interest rates the A-REITs have performed well compared to the broader stock and bond markets. This paper will seek to further investigate this relationship by analysing the trends in Australian interest rate cycles and A-REITs performance using the capital asset pricing model. In particular, it will review performance data across five A-REITs sectors: diversified, industrial, retail, office and specialised (non-core) REITs. The analysis was undertaken over a 20 year period (1995-2015) involving A-REIT returns, macro-economic data, with the 90-day bank bill yield and 10-year government bond yield rates used respectively for short-term and long-term interest rate proxies. Findings indicate that both the diversified and retail sector exhibit strong relationship to market risk, short and long-term interest rates. Rising short-term interest rates contribute to positive returns while rising long-term interest rates result in lower returns. However, the impacts of movements in interest rates on industrial, specialised (non-core) and office sectors were not well explained by the asset pricing model. This could due to the relatively small size of these funds.