IT WAS a strong reporting season for ASX-listed property largely due to a post-pandemic bounce-back, says Pendal’s Julia Forrest.
Owners of shopping centres, and property fund managers were the stand-out sectors, while office trusts were still struggling.
Higher interest rates will have negative effects on the sector, but locally many Australian Real Estate Investment Trusts (REITs) have hedged against higher debt costs and offer reasonable value.
The pandemic — and government regulations instituted in response — hurt revenue and profits in the property sector. But that’s now ended earnings across the sector were up 19 per cent last financial year — or 14 per cent if you exclude fund managers, Forrest says.
For the owners of big shopping centres, it was a very good earnings season.
“The malls had the biggest rental abatements during Covid, but they are now not too far off where they were pre-COVID. It is quite extraordinary that they’ve been able to come back to where they were FY19,” Forrest says.
While things are improving, they aren’t back to ‘normal’. Vicinity Centres, which owns shopping centres across the country, reported 10 to 12 per cent lower foot traffic.
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“Foot traffic is returning on the weekends but not during the week. Having said that, sales have surpassed FY19 because we’re spending 30 per cent more when we do go to shopping centres,” Forrest says.
“We don’t quite know how much of that is permanent but we are seeing food and beverage coming back in malls. Even cinemas are coming back.”
The other stand-out sector within property was the fund managers, Forrest says, nominating Goodman Group, which focuses on industrial property, and Charter Hall. Both expect to maintain earnings growth this financial year.
“It’s a function of assets under management. They have both been acquisitive the last year or two and they have big development pipelines, and they have the tail wind of asset values going up.”
Industrial property was a particularly strong performer during COVID, as businesses scrambled for space to fulfil e-commerce sales. But unlike many other parts pandemic favourites, industrial remains strong.
“Rental growth in the US is well over 20 per cent. In Europe its ten to 12 per cent. Australia has the lowest industrial vacancy rate in the world … and growth is around 20 per cent. Supply hasn’t been able to keep up with demand,” Forrest says.
While fund managers and shopping centres are performing much better than during the pandemic, the outlook for the office sector is less certain.
“In FY22 it was impacted by lockdowns again,” Forrest says. “It’s just a function of people not returning to work, though there’s a sense that it has started to improve in the past couple of weeks.
“We got through COVID and the flu season … and maybe people want to be in the office because things are getting more difficult.”
There has been a preference for better space, but vacancy rates remain high and more supply will hit the market in coming years.
For investors looking at buying or selling property in a rising interest rate environment, Forrest says there’s three ways to think about interest rates.
The first is ring interest rates make fixed income alternatives more attractive.
The second is that as rates rise, discount rates increase, and asset values fall. An exception she says is industrial space because demand is so high. And finally, the cost of debt rises.
Fortunately, many companies in the REITs sector have hedged their debt exposure, so rising rates won’t hit interest costs too hard.
“And the sector looks reasonable value,” Forrest says. “It’s trading at around 15 times which is a discount to the all-industrials… and excluding the fund managers, it’s at a 16 per cent discount to NTA (net tangible assets).”
“We’re looking at EPS growth of a bit over three per cent … and an initial yield, excluding fund managers, of around five per cent, so eight per cent isn’t bad.”
Julia Forrest has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.
Pete Davidson is Pendal’s Head of Listed Property. Over the past 34 years Pete has held financial markets roles spanning portfolio management, advisory and treasury markets. he specialises in the property, retail, insurance and infrastructure sectors.
Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.
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