March 2024 quarter ASX A-REIT market update - Cromwell Funds Management
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Home March 2024 quarter ASX A-REIT market update
April 22, 2024

March 2024 quarter ASX A-REIT market update

Stuart Cartledge, Managing Director, Phoenix Portfolios


Market Commentary

The S&P/ASX 300 A-REIT Accumulation Index continued its march higher in the first quarter of 2024, gaining 16.2%. Property stocks meaningfully outperformed broader equities in the quarter, with the S&P/ASX 300 Accumulation Index adding a lesser 5.4%. This outperformance was predominantly driven by the 33.6% return of Goodman Group (GMG), which is the largest component of the property index, with a weighting of approximately 36%. The median return of stocks in the property index was a lesser 6.2%. Of 33 stocks within the index, only five were outperformers.

During the quarter, companies under coverage reported financial results for the period ended 31 December 2023. In general (with some notable exceptions), financial results were marginally better than expectations, demonstrating the resilience of property income streams. Outlook statements tended to acknowledge uncertainty, as the future path of interest rates remains a key input into likely outcomes.

Retail property was one of the stronger subsectors in the March quarter. Results released in February’s reporting season showed solid sales growth within shopping centres and even more impressive were the much-improved re-leasing spreads. Owner of Australian Westfield shopping centres, Scentre Group (SCG) led the way, gaining 16.2%, whilst foreign owner, Unibail-Rodamco-Westfield (URW) also moved sharply higher, adding 14.8%. Peer, Vicinity Centres (VCX) underperformed the index, but performed strongly, up 7.3%. Owners of smaller neighbourhood shopping centres didn’t keep up with their larger competitors, with Region Group (RGN) lifting 5.8% and Charter Hall Retail REIT (CQR) finishing the quarter 2.8% higher.

Once again it was office property that was the laggard as elevated vacancy and incentives continue to create concern about the prospects of office ownership. Dexus (DXS) materially underperformed the index, up 3.0%. Centuria Office REIT (COF) was weaker still, adding only 1.9%, whilst GDI Property Group (GDI) lost 5.4%. Large capitalisation office owner GPT Group (GPT) also had a tough quarter, losing 1.5%.

Returns of property fund managers were mixed through the quarter. As previously discussed, it was GMG that dominated all comers. HMC Capital Limited (HMC) outperformed, finishing the quarter 17.7% higher, but much of its performance was tied to non-property funds management targets. Charter Hall Group (CHC) also performed solidly, gaining 14.2%. Centuria Capital Group (CNI) couldn’t keep up with peers, losing 0.3% whilst Elanor Investors Group (ENN) gave up 12.2%.

For some time, we have highlighted the disconnection between private real estate valuations and public real estate equity share prices. It is inevitable, given time, that this gap closes. This can occur through private market devaluations, share price appreciation or M&A transactions serving to close the gap (or some combination of those options). During the quarter we have seen a combination of all three, with valuations moving marginally lower, share prices moving meaningfully higher and we have also begun to see some M&A activity. Each of Newmark Property Group (NPR), Eureka Group Holdings (EGH) and Hotel Property Investments (HPI) received takeover bids or had strategic parties acquire large stakes in the companies. Each of these companies were amongst the few outperformers in the quarter. Should small capitalisation securities continue to underperform, we would expect M&A activity to be an ongoing feature of the market.

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.

About Stuart Cartledge

Stuart is the Managing Director of Phoenix Portfolios and the portfolio manager for each of the company’s property portfolios. Prior to establishing the business in 2006, Stuart built a strong track record in the listed property security asset class and has been actively managing securities portfolios since 1993. Stuart holds a master’s degree in engineering and management from the University of Birmingham and is a Chartered Financial Analyst.

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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