Potential returns from two key sources: capital appreciation and dividend income
With the US Federal Reserve cutting interest rates to zero and signaling no further rate hikes until 2022, we believe the lower-for-longer environment is beneficial to AP REITs - particularly given the global search for yield. The yield spread between AP REITs and the risk-free rate1 has widened2, compared to the end of 2019, which means investors are being compensated more for holding the asset class.
Year-to-date yield spread movements in three regional REIT markets2
The dividend component of REITs has historically offered investors relatively attractive and sustainable sources of income. Over the past 10 years (as of 31 August 2020), AP REITs have delivered an annualised return of 7.85% p.a., of which 2.83% represents capital appreciation and 5.02% is from dividend income. From a defensive perspective, we believe the stable income stream of REITs also provides a buffer to help cushion overall losses during down markets.
AP REITs have provided relatively attractive returns over the past decade3
We believe that AP REITs are now in a stronger position to face the economic downturn, as they grown in financial strength in the years following the 2008 global financial crisis. What's more, AP REITs have a generally lower leverage ratio and cost of debt together with a longer debt maturity than they had in 2008.
AP REITs' improving balance sheets in the aftermath of the global financial crisis4
1. The respective country's 10-year government bond yield is typically used as a proxy for the risk-free rate.
2. Bloomberg, as of 31 August 2020. Australia REIT market measured by S&P/ASX 200 A-REIT Index, Hong Kong REIT market measured by Hang Seng REIT Index, Singapore REIT market measured by FTSE ST Real Estate Investment Trusts Index. The comparison is made between 30 June 2020 and 31 December 2019. Past performance is not indicative of future performance.
3. Bloomberg, as of 31 August 2020. Total return of AP REITs performance is the FTSE EPRA Nareit Asia ex-Japan REITs Total Return USD Index, while price return is taken from the FTSE EPRA Nareit Asia ex-Japan REITs Index. Dividend returns are calculated as the difference between the two indices. Indices are rebased to 100 as of 30 June 2010. Past performance is not indicative of future performance.
4. Respective company reports, 31 December 2019. This information is provided for illustrative purposes only.