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Home December 2024 quarter ASX A-REIT market update
February 5, 2025

December 2024 quarter ASX A-REIT market update

Stuart Cartledge, Managing Director, Phoenix Portfolios

Market Commentary

The S&P/ASX 300 A-REIT Accumulation Index gave back some of the gains seen in the previous quarter, dropping 6.1%. Property stocks underperformed broader equities in the period, with the S&P/ASX 300 Accumulation Index only losing 0.8%. The key factor affecting the performance of property stocks was the movement in interest rates. After beginning the quarter at just under 4.0%, the Australian Government 10 Year Bond yield, closed 2024 at approximately 4.4%. Related to this, expectations of interest rate cuts by the Reserve Bank of Australia have been delayed.

Office property owners were particularly weak during the quarter. Some sales evidence across a range of office property types did occur in recent times after an extended dearth in transactional activity. Dexus (DXS) announced the sale of two properties, 100-130 Harris Street in Pyrmont, adjacent to the Sydney CBD and 145 Ann Street in Brisbane, both at a capitalisation rate of approximately 7.6%. The sales represented a small discount to prevailing book values and are significantly below peak valuations. DXS closed the quarter down 9.6%. Other office owners fared worse, with Centuria Office REIT (COF) off 11.4%, GDI Property Group (GDI) losing 11.8% and Cromwell Property Group (CMW) giving up 13.9%.

Shopping centre owners performed broadly in line with the property index after strong performance in recent periods. Owner of Australian Westfield-branded shopping centres Scentre Group (SCG) lost 6.0%, whilst the owner of foreign Westfield-branded shopping malls, Unibail-Rodamco-Westfield (URW), dropped a similar 5.9%. Competitor, Vicinity Centres (VCX), fell a lesser 5.0%. Owners of smaller neighbourhood and subregional shopping centres underperformed their larger counterparts. Region Group (RGN) lost 6.7% and Charter Hall Retail (CQR) w as weaker, off 9.3%.

Owners of industrial property were also mostly underperformers, as market rent growth appears to have cooled from generationally strong numbers, however, remains positive. There also appears to be an increase in incentives offered to industrial tenants providing further evidence of a slowdown. Dexus Industria REIT (DXI) finished the quarter 10.0% lower, while Centuria Industrial REIT (CIP) fell 10.6%. Bucking the trend was Garda Property Group (GDF), which rose 5.4% in the quarter. This solid result came on the back of the sale of GDF’s massive North Lakes asset. The asset is a big land holding in the North of Brisbane, slated for the development of an industrial estate. Its true value was highly uncertain and the sale for $114 million (to close in 2025) both provides certainty and crystalises meaningful value creation for GDF shareholders. Property fund managers faced mixed fortunes in the quarter. Negatively, Charter Hall Group (CHC) underperformed, dropping 8.7%. Goodman Group (GMG) outperformed the broader index, however still lost ground, finishing the quarter 3.2% lower. Property debt fund manager Qualitas Group (QAL) was a strong performer, adding 16.1%, as it will be a beneficiary of higher interest rates to the extent that they do not cause losses on residential development projects. HMC Capital Limited (HMC) rallied, gaining 20.2% after listing a data centre REIT in the period. For more, see this quarter’s feature article below.

As we flagged may be the case, M&A activity in undervalued, small capitalisation property stocks has seen a noticeable uptick. Both AV Jennings Limited (AVJ) and Eumundi Group Limited (EBG) received takeover bids at meaningful premiums to prevailing share prices. For more see the performance commentary section of this report. In addition, CQR’s takeover of Hotel Property Investments (HPI) appears all but certain to complete, having gone beyond the minimum acceptance level.

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Market Outlook

The listed property sector is in good shape and provides investors with the opportunity to gain exposure to high quality commercial real estate at a discount to independently assessed values. While share market volatility may be uncomfortable at times, the offset is liquidity, enabling investors to rebalance portfolios without the risk of being trapped in illiquid vehicles.

Rising interest rates have been a headwind for many asset classes, with property, both listed and unlisted, a particularly interest rate sensitive sector. More recently, interest rates have been volatile, leading to mixed returns in property securities. The August reporting season saw stocks providing solid updates, with meaningfully more optimistic outlooks, based on the assumption that interest rates may have peaked and begun to come down. Long term valuations are driven by “normalised” interest costs, meaning the impact of short term hedges maturing is mostly immaterial. Should the forecast decline in interest rates eventuate, performance may be solid once again.

The industrial sub-sector continues to be the most sought after, given the tailwinds of e-commerce growth, the potential onshoring of key manufacturing categories and the decision by many corporates to build some redundancy into supply chains to cope with current disruptions. All of these factors are contributing to ongoing demand for industrial space, which is evident by rapidly accelerating market rents and vacancy rates at historic lows of around 2% in many markets. Strong rental growth has somewhat cooled and has been offset by capitalisation rate expansion in recent periods resulting in flat valuations and capitalisation rate spreads to government bonds more in line with long-term norms.

We remain cognisant of the structural changes occurring in the retail sector with the growing penetration of online sales and the greater importance of experiential offering inside malls. Recent performance of shopping centre owners has however been strong, with consumers showing resilience and share prices moving sharply higher. It is interesting to note the juxtaposition of very high retail sales figures despite very low levels of consumer confidence, no doubt impacted by rising costs of living. Importantly, we are also now seeing positive re-leasing spreads in shopping centres, indicating strengthening demand from retail tenants.

The jury is still out on exactly how tenants will use office space moving forward, but demand for good quality well located space remains. Leasing activity is beginning to pick up, and there has also been some transactional activity, albeit at prices typically at discounts to book values. Incentives on new leases remain elevated.

We expect to see further downside to asset values in office markets, but elsewhere expect market rent growth to largely offset cap rate expansion, particularly in industrial assets.  Listed pricing provides a buffer to such movements.