ASX real estate investment trusts (REITs) are looking more appealing as United States interest rates come down, office values stabilise, and retail assets hold up despite weak consumer sentiment, analysts say.
The S&P/ASX 200 A-REIT Index (ASX: XPJ) is having a good day on Thursday, up 1.43%. Real estate is the second-best performing sector today behind the S&P/ASX 200 Materials Index (ASX: XMJ), up 2.38%.
The benchmark S&P/ASX 200 Index (ASX: XJO) is up 0.62% to 8,192.9 points at the time of writing.
In earlier trading, the benchmark index hit a new record high of 8,186.9 points amid a 50-basis-point cut to United States interest rates and the release of new unemployment figures in Australia. This afternoon, the index notched another new record high of 8,200.3.
Over the past 12 months, ASX REITs have risen by 36.8%, while the ASX 200 has lifted by 14.3%.
The ASX property sector has had a rough few years amid higher interest rates and many changes.
The pandemic led to the downgrading of office real estate assets in the new work-from-home era, but there are signs of recovery now.
Data centres emerged as hot property amid the growing digital economy — turbocharged by COVID lockdown periods — and the rising use of artificial intelligence (AI) today.
Retail assets have faced headwinds, including reduced demand for retail space as more customers began shopping online and lower consumer spending amid higher inflation.
However, several analysts say change is underway for ASX REITs, and now might be the time to buy them.
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'Clear inflection point' for ASX REITs, say analysts
In The Australian today, CLSA analysts James Druce and Adam Calvetti described a "clear inflection point" for ASX REITs following last month's earnings season.
This is based on expectations that US and Australian interest rates had peaked, as well as trough earnings for several REITs, including Dexus (ASX: DXS), Vicinity Centres (ASX: VCX) and Stockland Corporation Ltd (ASX: SGP).
They also said there were indications the transaction market was opening up as asset values stabilised.
They've put an overweight rating on the ASX REITs sector, commenting:
We expect the residential sector to pick up again on rate cuts, after constant pressure on volumes and margins, from high construction costs, subcontractor delays and elevated interest costs.
Generally, we are more comfortable asset values have troughed. We see more devaluations in office, between 3 per cent to 5 per cent based on transactions in the market.
Barrenjoey head of REITs research, Ben Brayshaw, is also optimistic about ASX REITs from here.
He notes that bank funding costs have eased, which is being passed on to REITs through lower margins.
He said while capitalisation rates, which are used to measure property values, have expanded 75 basis points since their peak, gearing ratios had stabilised for the first time in 18 months.
Brayshaw said:
This puts REITs in a more favourable light. Investors could be well served to increase their allocation to the sector, in our view.
He added:
Elevated levels of rate volatility and consensus earnings downgrades have largely kept investors on the sidelines over the last two years, not knowing when to catch a falling knife.
The cycle appears to have turned: average gearing levels stabilised this season, and credit conditions for REITs are starting to ease.
JPMorgan analyst Richard Jones said investors were showing new interest in ASX REITs.
Jones said:
We saw increased sector interest beyond the well-held Goodman Group (ASX: GMG) as investors positioned for global central bank easing and turned more defensive amidst negative earnings revisions across much of the ASX 200.
Pros and cons of investing in ASX REITs
As recently reported, Clive Maguchu from State Street Global Advisors says there are pros and cons to ASX REITs.
The pros include exposure to property without having to own physical real estate directly, as well as income generation, portfolio diversification, and liquidity.
State Street also considers ASX REITS an inflation hedge because real estate values have historically risen with inflation.
The cons include less potential capital growth, impacts from a property market and/or share market downturn, higher interest rates, and management risks.
