What's In Store For REIT's After The Selloff?

Australian REIT Sector In Review

The Australian real estate investment trust (REIT) sector has experienced a strong selloff in price in the last 6 -7 weeks. After reaching a 52 week closing high of 1,557.86 on the 1st August, the sector began to experience weakness around the same time as global bond yields started to rise sharply from record lows. Click my previous post: Is the bull market in stocks ending? where I cover the rise in Government bond yields and its potential impact on global stock markets.

Because REIT's typically use short term (3-6 year) lending facilities to gear their real estate portfolios. The fall or rise in Government bond yields over time, directly impacts the interest rates banks charge when the REIT's refinance their lending facilities. Hence the net income levels are directly impacted from changes in Government bond yields over time.

The REIT sector is usually a relatively stable sector, with lower volatility normally compared to other stock sectors. This is due to the long term rent contracts that are typically in place with commercial real estate portfolios. This makes them quite secure and stable as these rental contracts make up the bulk of the annual revenues for the majority of stocks within the REIT sector.

A Downtrend Has Started

Taking a look at the sector on a daily chart, you can that after reaching its high for the year on the 1st August, the sector began to show weakness and started to fall. The selling continued and its uptrend ended around the end of August which I have marked with the black circle below.

Once the uptrend was broken and reversed trend, the selling accelerated with sharp falls occurring over a 2 week period. This was coupled with an increase in volume (see chart) in the last 2 weeks which is a bearish sign.

However on a positive note for the sector, after touching the support level of 1,360 it was able to rally higher and finish off the lows reached mid week.

Looking ahead the sector needs to stay above the 1,360 support level over the next few weeks, in order to consolidate before looking to close above its new downtrend (see chart), to consider resuming its previous bull uptrend again.

Viewing the REIT sector on a longer term horizon with the weekly chart, the overall picture is actually quite positive compared to the daily chart. You can see within the chart that the sector is still with in its long term uptrend that began in August 2011.

Last week the sector reached the support level of 1,355/60 and also touched its uptrend before bouncing off the lows during mid week and finished slightly higher at 1,387.66. This is a positive sign that it was able to respect the long term uptrend and bounce of support.

The Key Issues For The REIT Sector

While the sector still remains in in uptrend for now, its important that it remain within its uptrend and not close below its trend to form a reversal and new long term downtrend.

The other key consideration or clue for the long term direction of the REIT sector, and whether the long term uptrend remains in tact, is the direction of Government bond yields. If the uptrend that has recently started for Government bond yields continues and keeps rising, then its most likely that the sector will end its 5 year bull run.

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.