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Has the ASX 200 A-REIT hit bottom?

It’s been a tough year for Australia’s REITs: the ASX 200 A-REIT index was down as much as 31% year to date in September. It’s since recovered by 17%. Could this continue or will the trend reverse?

Has A-REIT hit bottom? Source: Bloomberg

Real Estate Investment Trusts (REITs) hold real estate assets that they lease out and pay the majority of the dividends to unit holders. The units are traded the same as shares on the Australian Stock Exchange.

This gives REITs similar properties to fixed-income investments – particularly with regard to prevailing interest rates.

However, there are other factors to consider in the outlook for REITs. In the current Australian context, housing demand, office demand, education and tourism, and the economy all play a part.

Interest rates may be peaking

Australia’s Federal Reserve target rate is currently 3.10% , up from 0.1% at the start of the year. This rapid rate has wreaked havoc on REIT shares as the market repriced their dividend streams based on prevailing interest rates.

However, the outlook appears to be close to stable. Economists at Australia’s big four banks forecast interest rates to peak at between 3.10% and 3.85% in the first half of 2023. The 25 basis point rise on 12 June puts interest rates into the range already.

As markets tend to be forward-looking, REITs should rise ahead of the expected peak in interest rates, all other factors being equal.

Tourism and education are recovering

In 2019, 8.7 million visitors came to Australia for an average of 32 days each. This increased the average population of Australia by 763,000 people – 3% of the population.

So when tourism dropped to almost zero in 2020, the country had 763,000 excess beds.

Arrivals have increased recently, with 384,000 arrivals in August – almost half of the arrivals in August 2019.

And more is to come: The Albanese government announced it would almost double the skilled immigration target for 2022-2023 from 79,600 to 142,400.

The economy appears to be recovering

The economy appears to be on the road to recovery, with 0.9% and 0.7% growth in the first two quarters of 2022, respectively.

The September ANZ property council survey showed positive capital growth expectations for the next 12 months in industrial, retirement, and tourism properties.

Office demand remains subdued

Even though the pandemic is effectively over, many companies and workers have embraced the hybrid model of working from home several days per week – or even permanently. As a result, the property council survey showed a negative outlook for office space.

Housing prices are still falling

According to CoreLogic, home values fell by an average of 3.3% in October 2022. Sydney prices are faring the worst, down a steep 10.6% year on year as of November 30. The property council survey continues to show a negative growth outlook for retail properties.

REITs could be a mixed bag

While interest rates should affect all of the REITs, it’s possible that those with industrial, tourism and retirement properties may have bottomed, and residential and office REITs appear to have further headwinds.

Office REITs such as Centurial Metropolitan REIT and Australian Unity Office Property Fund may have further to run on the downside. However, industrial REITs such as Centuria Industrial REIT and National Storage REIT may have bottomed and could continue to rise from here.

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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