“I still maintain that when CBD office leases expire, retention rates may decrease slightly, but floor space requirements will be much lower, perhaps as much as 20%, reflecting current practices. working from home – suppose your staff work four days in the office and one at home, that’s a 20% reduction in space required,” he said.
All REITs should take advantage of the current spike in valuations to sell assets and return capital to unitholders, he argues. “The big problem is that they don’t sell.”
UBS analysts Grant McCasker and Tom Bodor said a dramatic shift in markets, adjusting sharply to rising inflation and interest rates, was underway this year.
Inflation will boost income from leases linked to the Consumer Price Index, with funds like Scentre Group, BWP Trust, Rural Funds Group and Charter Hall Long WALE REIT to benefit.
But any increase in the Reserve Bank’s cash rate could negatively impact unhedged debt held by companies like Centuria Industrial REIT, Charter Hall Long WALE REIT and HomeCo Daily Needs REIT, reducing future earnings.
“While we are underweight A-REITs in the context of Australian equities and in APAC for real estate, given a strong negative correlation to interest rate movements, the sector quickly adjusted to the macro movements,” they said.
Loading
“From there, the valuation is more balanced and we have a preference for residential, given the valuation starting point and the selection of key names that should be structurally supported as COVID becomes more endemic in the society.”
They review companies like Stockland, Mirvac, Lendlease, GPT and Scentre Group.
“Rarely have policymakers and investors faced such a complicated backdrop,” said Tony Brinker of Select Equities.
Select Equities believes a spike in US inflation is on its way, with caution that energy prices remain high and recent gains are likely to add to inflationary pressures in the months ahead.
But, he said, “any decline in inflation momentum will not only invigorate REITs, but also tech, healthcare and other growth-related names.”
REITs, as an industry, are challenged on a relative performance basis against others. Year-to-date, Australian REITs are down 8.5% versus the ASX 200, itself down 4.5%.
Some, like retail REITs exposed to the normalization of consumer spending habits as the pandemic subsides, could outperform.
“More complicated is how the unfolding of the pandemic will act as an overlay to commercial office REITs and residential/retirement REITs,” he said.
