Macro Intelligence: ASX REITs rebound amid rate cut hopes and housing boost

Article written by Nadine Blayney (ausbiz)

Headwinds wane & tailwinds blow

After starting 2024 with a bang on hopes for speedy interest rate cuts, the real estate investment trust (REIT) sector has since been at the mercy of changing expectations around official interest rates.

It was thought interest rate cuts would come to fruition as inflation returned to the 2-3% Reserve Bank of Australia (RBA) target band. However, surprisingly strong first-quarter inflation data pushed the rate cut timetable to later in the year, throwing cold water on some of the sector’s promise.

Global investor T. Rowe Price, for example, moved to ‘neutral’ from ‘overweight’ on REITs in April, citing an expectation that bond yields would move higher due to sticky inflation.

REITs are sensitive to higher interest rates because they increase the cost of borrowing. Higher rates also tend to decrease the value of properties. Elevated interest rates can also make the relatively high dividend yields REITs offer less attractive on a risk-reward basis.

While interest rate cuts are still not expected until late in the year, tailwinds for the ASX-listed real estate sector are once again starting to blow.

Economic data is beginning to show a slowdown in the Australian economy, with the jobless rate rising to 4.1% in April. The March quarter wages data also proved to be softer than expected, which may help slow sticky services inflation. The recent data keeps the prospect of an interest rate cut on the table by the end of the year and largely rules out an interest rate hike.

ASX 30-day interbank futures signal steady rate outlook

Federal budget as a catalyst

The federal budget could also prove to be a tailwind for parts of the listed property sector, with $6.2 billion in new initiatives to address housing supply pressures, including increased rent assistance, a lower foreign investment fee for build-to-rent properties, and $2 billion in new infrastructure spending for Western Sydney.

Beyond bricks and towers

The S&P/ASX 200 A-REIT index tracks the performance of Australian real estate investment trusts and mortgage REITs. Australian-listed REITs are investment vehicles that provide exposure to property assets such as office towers, shopping malls, industrial buildings, hotels, and cinemas.

Year to date, the index is up 12.08%, compared to the S&P/ASX 200, which is up 2.94%. However, there can be a stark divergence in the performance of different companies and sub-sectors within property, for example, between office and industrial real estate stocks.

A-REIT index nears record highs amid robust property market

Emerging trends: data centres

Data centres are also an emerging theme amongst Australian-listed REITs.

“There are so many tailwinds,” David Yuile, CEO of Global Data Centre Group, recently told ausbiz. “It's good now and it just gets better if interest rates come down and more capital will flow into the sector. And the amount of capital required in the sector is just staggering.”

A-REIT winners and losers

• Dexus (DXS)

Macquarie published a note on Australian real estate in the wake of the Federal Budget. It points to the government’s requirement for universities to build more student accommodation as potentially positive for Dexus (DXS) and GPT Group (GPT). While Macquarie has an ‘outperform’ rating on Dexus and a $7.38 price target, the company’s share price has been under pressure, with analysts divided on their recommendation for the stock.

Dexus daily chart

Analyst recommendations: mean rating and price target

• Mirvac Group (MGR)

Macquarie expects the elevated cash rate will continue to negatively impact housing affordability; however, it says the budget’s housing package should help reduce development time frames, which is positive for Mirvac Group (MGR) and Qualitas Ltd (QAL).

Macquarie has an ‘outperform’ rating on Mirvac Group; according to Refinitiv data, the consensus call on Mirvac is ‘hold.’

Mirvac Group daily chart

Evolving analyst ratings highlight uncertainty around stock's prospects

• Scentre Group (SCG)

Budget efforts to alleviate some cost-of-living pressures will help drive discretionary spending, according to Macquarie, which will in turn benefit REITs such as Scentre Group (SCG), Vicinity Group (VCX), and GPT. In keeping with Macquarie’s thesis, Westpac’s May consumer confidence report supports this outlook.

Macquarie recently upgraded Scentre Group to ‘outperform’ from ‘neutral,’ with a price target revised higher by 11% to $3.37. The current consensus recommendation according to Refinitiv is ‘buy.’

Scentre Group daily chart

Dynamics of analyst recommendations highlight market volatility

• Qualitas (QAL)

Macquarie analysts say the Government’s commitment to encouraging investment in build-to-rent properties will be positive for the likes of Mirvac and Qualitas, which are becoming active in the sub-sector. Macquarie has an ‘outperform’ rating on Mirvac with a $2.89 price target.

Qualitas daily chart

Analyst recommendations: mean rating and price target

• GPT Group (GPT)

Macquarie also surmises that the government's budgeted investments in road and rail infrastructure, including $1.9 billion for projects in Western Sydney, will be positive for medium-term completions and longer-term tenant demand, benefiting companies such as Charter Hall Group (CHC), Goodman Group (GMG), GPT Group (GPT), and Mirvac (MGR).

Macquarie rates GPT ‘outperform’ with a price target of $4.61.

GPT Group daily chart

Analyst recommendations: mean rating and price target

• Goodman Group (GMG)

Goodman Group accounts for almost 38% of the ASX 200 A-REIT index. It has been a market favourite for quite some time due to its industrial focus, and more recently for its data centre pipeline. It upgraded FY24 earnings per share growth guidance to 13% in May, but Citi analysts reckon it could beat this in the upcoming FY earnings season due to both inorganic and organic earnings drivers.

Citi has a ‘buy’ rating on the stock, with a price target of $32.50. In contrast, while Ord Minnett recently lifted its price target on the stock to $24.00, it says the upside is fully priced into the current share price. It predicts data centre projects will be more profitable than previously anticipated and will account for half of Goodman Group’s work-in-progress in the next few years, up from 40% currently.

Goodman Group daily chart

Analyst recommendations: mean rating and price target