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SQM Research Ratings Update -  Friday 16th October 2015
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SQM Research
Ratings Update

SQM Research has released the ratings for nine Domestic Property Securities funds as part of its 2015 sector review.

Today, SQM Research released the ASX listed Domestic Property Securities Sector Review. Nine A-REIT funds participated in the 2015 sector review and the ratings awarded ranged from 3¾-star to 4½-star ratings, with all the funds maintaining the ratings received in October 2014.

Australian REITs rallied in 2014 and first quarter of 2015. For the year to June 2015, the S&P/ASX 300 A-REIT TR Index delivered a solid annual return of 20.2% compared to the 11.87% delivered the same time last year. The S&P/ASX 200 A-REIT Accumulation Index delivered a return of 20.3%, significantly (9.21%) higher than the return recorded a year ago. The strong performance recorded in the A-REIT sector is bolstered by increases in capital values on the back of a high level of demand and weight of money from both on and offshore investors. Colliers International recorded greater transaction values for 2014 across all the main property sectors, in Australian. Reflecting the strong returns recorded by the A-REIT sector for the year to June 2015, all the funds delivered high double digit returns.

Traditionally, real estate returns have predominately come from income; in fact this thesis underpins the investment philosophy of some A-REIT funds. In recent times, the increase in capital values is challenging this thesis. Similar to their global counterparts, although to a lesser extent, growth in asset values is increasingly contributing more to total return.  In 2014, growth in Australian non-residential assets values represented 33% of total return compared to 43% for global real estate returns. Record low interest rates have motivated investors to hunt for yield and some of these investors have increased their allocation to real estate assets as a consequence. In addition, investors are now able to borrow at near zero interest rates in many jurisdictions, fuelling carry trades in various assets classes offering decent yields including real estate assets. All these combined with the weaker Australian dollar has increased the proposition for capital inflow into Australia and in particular in real estate assets.

The risk-averse mood re-emerged in financial markets in the second half of 2015, on the back of poor economic data from China, disappointing report on Australia’s growth rate, concerns over Greece and concerns over the impact of US interest rate increases on emerging markets. The market is also still on the watch for interest rate increases by the US Federal Reserve Bank. The A-REIT sector is not immune to global news and at 31 August 2015, the S&P/ASX 300 A-REIT Accumulation Index recorded an annual return of 14.2% down approximately 20% from 31 March 2015.
Against the backdrop of the global macro level concerns, the year ahead is highly uncertain and it’s reasonable for investors to not expect the high double digit returns from A-REIT assets witnessed in 2014. A-REIT assets are not immune to short-term market sentiment and in the current volatile environment macro risks can result in dispersion of returns. Active managers can choose to take advantage of the buying opportunities presented by the increased volatility in the market. Despite the increased volatility in the market, investors should remember the defensive nature of the asset class underpinned by the characteristics of the A-REIT income streams, being contractual rental income with varying lease terms of up to 20 years. The rental contracts are often linked to annual consumer price index.
Despite the global macro concerns, Moody’s Investor Service, on 1 October 2015, announced its stable outlook for the A-REIT sector, over the next 12 – 18 months. The stable outlook reflects Moody’s expectation that the sector’s operating income will increase modestly.

For further information:
Louis Christopher
Managing Director
SQM Research
Tel: (02) 9220 4666
Pamela Wightley
Investment Analyst
SQM Research
Tel: (02) 9220 4602
About SQM Research
SQM Research Pty Ltd is an independent investment ratings and forecasting research house covering all asset classes. SQM Research also supplies residential property data and property related reports and guidance to financial institutions, property developers and real estate investors.
For more information please visit

Research Methodology

In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products,
Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above – Outstanding. Highly suitable for inclusion on APLs.
4 stars to 4.25 stars – Superior. Suitable for inclusion on most APLs.
3.75 stars – Favourable. Consider for APL inclusion.
3.5 stars – Acceptable. Consider for APL inclusion, subject to advice restrictions.
3.25 stars – Caution required. Not suitable for most APLs.
3 stars – Strong caution required. Not suitable for most APLs.
Below 3 stars – Avoid or redeem. Unapproved.
Hold – The rating is currently suspended until SQM Research receives further information. A rating is typically put on hold for a period of 2 days to 4 weeks.
Withdrawn – The rating is no longer applicable.
Significant issues have arisen, and investors should avoid or redeem units in the fund.

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