**Other in the US REIT Universe includes Cell Tower, Data Centres, Health Care, Triple Net Lease, Specialty, Self-Storage, Lodging & Resorts, Timber, Manufactured Homes, Single Family Homes, Life Sciences, Student Housing
Source: LaSalle Investment Management
Global REITs provide a wider opportunity set, while the A-REIT sector via ASX has the potential for strong growth towards niche sectors.
How niche A-REITs differ from larger/traditional A-REITs
This varies across sectors. Generally, the market capitalisation of niche REITs tends to be lower, less than $2 billion, with the exception of National Storage REIT (ASX: NSR). Asset sizes (in niche A-REITs) tend to be smaller, which has traditionally seen them less likely to be owned by institutions. A-REITs have the advantage of assembling portfolios of scale.
Lease terms can be longer in the case of hotels, data centres, childcare and healthcare properties, with the tenants being responsible for maintenance capital expenditure.
With storage, rental agreements are short term and the landlord is responsible for maintenance capital expenditure. Tenant incentives in niche sectors are also less prevalent than in office and retail property.
However, because they often own smaller assets, many niche A-REIT sub-sectors are the domain of private investors. As a result, pricing (for their assets) may already be highly competitive. Barriers to entry may also be lower in building assets (given the size of the assets, planning and build time) than some of the traditional core real estate – in particular, large-scale retail centres.
Who niche A-REITs suit
Niche sectors may suit investors looking to diversify their property exposure and increase lease tenure. In many cases, niche property sectors have the attraction of being less economically sensitive. The A-REIT sector is an efficient way to access niche sectors given liquidity and low transaction costs.
There may also be the opportunity to re-rate (increase in price), as these sectors become more mainstream and attract more investment from fund managers. Several niche sectors will have tailwinds, in SG Hiscock’s view. For example:
- Data centres – growth of data
- Childcare – increased workforce participation rate
- Health and age care – ageing demographics
- Retirement – ageing demographics
However, tailwinds do not always correlate to superior investment returns as tailwinds are well identified and can be imbedded in pricing, with a high propensity for competition, particularly if the barriers to entry are low.
Pricing of niche sectors compared to traditional core sectors
GPT Group (ASX: GPT) is the oldest A-REIT, having a diversified portfolio of the traditional subsectors with approximately 40% office, 40% retail and 20% industrial property. GPT, being a stapled security, has the advantage of operating a funds-management business as well.
(Editor’s note: Do not read the following commentary as a recommendation on GPT or niche A-REITs. Do further research of your own or talk to your advisor before acting on themes in this article).
The table below provides comparison between the niche sectors within the S&P/ASX 300 A-REIT sector to GPT. Key terms in the table include:
- Forecast distribution yield
- Valuer capitalisation rate (market yield on property valuations)
- Implied capitalisation rate (representative of the implied pricing on ASX)
- Pricing to the physical market (is the public market trading at a premium to or at a discount to the private market?)
- Price to Net Tangible Assets (is the security price at a premium to or at a discount to book value?)
The aggregate niche sectors are trading at higher capitalisation rates in the private market versus traditional core real estate, which suggests scope for re-rating as the sectors attract more funds from institutional investors.
However, the table highlights that the benefits of the niche sectors in aggregate are well recognised in the A-REIT sector, with the group trading at a considerable valuation premium to the traditional core property on all metrics (noting that pricing does vary across the niche sectors).
GPT is trading at a discount to the private market and, consequently, it is currently buying back its own securities, taking advantage of that discount.