June 2024 quarter ASX A-REIT market update - Cromwell Funds Management
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Home June 2024 quarter ASX A-REIT market update
July 25, 2024

June 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 up some of its first quarter gains, falling 5.7% in the June quarter. Property stocks underperformed broader equities in the quarter, with the S&P/ASX 300 Accumulation Index losing a lessor 1.2%. Stronger than expected inflation figures led market participants to believe that any expected interest rate cuts by the Reserve Bank of Australia would be delayed, or that the next change in interest rates may even be a move higher.

Property fund managers saw quite divergent performance across the quarter. Goodman Group (GMG) led the way, rising 3.2%, significantly outperforming the broader property sector. GMG’s ongoing outperformance is leading to the unusual situation in which it now accounts for almost 40% of the entire property index. The impact on benchmark returns is clear, with the median property stock in the index down 8.6%, significantly more than the reported 5.7%. Centuria Capital Group (CNI) was also an outperformer in the period, giving up only 2.9%. Alternatively, each of Charter Hall Group (CHC), Elanor Investors Group (ENN) and Qualitas Limited (QAL), meaningfully underperformed, falling 17.0%, 14.4% and 10.6% respectively.

Office property owners were underperformers in the June quarter, as transactional evidence began to filter through after a dearth of transactions in recent periods. Dexus (DXS) reported the $296.2 million sale of 50% of 5 Martin Place, a somewhat new, A grade building in the heart of Martin Place in the Sydney CBD, at an implied capitalisation rate of above 6.1%. DXS also sold B grade asset, 130 George Street in Parramatta for $69.1 million at an implied capitalisation rate greater than 10% and more than 30% below its prior book value. Whilst this sale faced some asset specific concerns and Parramatta is a weaker submarket, the transaction reflects a challenging market for secondary office assets. DXS finished the quarter down 15.4%. Mirvac Group (MGR) pleasingly announced the unconditional exchange of a 66% interest in its 55 Pitt Street office development project, with an end value of approximately $2 billion, highlighting some demand for prime office investments. MGR also announced it had delivered on previously announced sales, including 367 Collins Street in the Melbourne CBD, which faced some prior delays. MGR was down 18.2% on the quarter. Centuria Office REIT (COF) was also weak, losing 15.0%, as was Growthpoint Properties Australia (GOZ), off 10.8%.

Residential property developers delivered mixed performance during the period, with the prospect of delayed interest rate cuts fighting against an ongoing supply/demand imbalance. There has been significant divergence in home price performance and new home sales across the country. After underperforming for many years, Perth has seen median dwelling price growth of more than 23% year over year, with some growth corridors significantly outpacing that number. Perth-based residential developers outperformed, with Finbar Group Limited (FRI) moving 21.7% higher and Peet Limited (PPC) up 0.4%. Melbourne has been significantly weaker, with new home and land sales falling meaningfully. The median dwelling value in Brisbane is now almost 10% above Melbourne and both Adelaide and Perth median dwelling values are within 3.5% of Melbourne. AV Jennings Limited (AVJ) has meaningful exposure to the Australian East Coast and dropped 19.7%. Stockland (SGP) was also a weak performer, giving up 10.6%.

Shopping Centre owners were also weak performers during the period, as consumer confidence and retail sales are beginning to show signs of fading. Some retailers including Mosaic Brands and KMD Brands (owner of Kathmandu), provided updates suggesting that conditions had been challenging in recent periods. Vicinity Centres (VCX) was a meaningful underperformer, off 13.1%, whilst Scentre Group (SCG) dropped 8.0%. Owners of smaller centres were not spared, with Charter Hall Retail REIT losing 12.4% and Region Group (RGN) finishing the quarter 9.2% lower.

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 meaningful 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. The February reporting season saw stocks providing solid updates, with cautiously optimistic outlooks, based on the assumption that interest rates may have peaked. 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, recent headwinds may dissipate and possibly reverse.

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 1% in many markets.
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. 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.

The content above is taken from the Cromwell Phoenix Property Securities Fund quarterly report. Sign up here to be the first to access the latest report and to gain a deeper insight into the Fund’s performance.

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