This article is from the Australian Property Journal archive
CORONAVIRUS disruptions heightening the demand on e-commerce has put industrial AREITs in the driver’s seat for income growth among its peers over the next 12 to 18 months, according to Moody’s.
The firm’s AREITs outlook said that despite long-term structural challenges, the AREIT sector as a whole is looking at net operating income growth of about 2-3% in that time.
A recovery in Australia’s economic growth over 2021 would support overall demand for AREIT assets. Moody’s anticipates GDP growth of 4.3% in 2021, compared with this year’s 5.3% contraction.
Rated AREITs are considered to excellent liquidity to navigate the challenging, recessionary environment, with minimal refinancing risk in the next. Interest coverage remains strong, on average at 5.0x across the portfolio, reflecting earnings growth and lower interest rates.
“We expect retail property values to decline in the next 12-18 months because of weak demand and economic activity resulting from coronavirus-related disruptions. Office property values will fall to a lesser degree. Continued demand will support industrial property values.”
Matthew Moore, Moody’s vice president and senior credit officer said a renewed focus on supply chains because of coronavirus disruptions and limited space availability will support demand for industrial assets, benefiting AREITs active in this space. These include Goodman Group, Goodman Australia Industrial Partnership and Charter Hall Prime Industrial Fund. Moody’s believes GPT, Mirvac, Dexus and Stockland will benefit given exposure to the sector within their diversified portfolios.
“We expect online sales growth will continue even after the pandemic, as consumers accept this way of shopping and retailers adjust their strategies toward more online offerings. This will occur as traditional brick-and-mortar retailers move online and rationalise existing retail footprints.
“We expect AREITs will continue reweighting their portfolios toward industrial assets and away from retail property. However, the shortage of available industrial property for sale may increase the risk of AREITs overpaying for these assets and/or investing in secondary locations.”
A shortage of quality assets is expected along the eastern seaboard. Moore said this will likely continue as demand outstrips supply and rezoning toward alternative uses reduces the amount of available industrial zoned land.
“Demand will accelerate over the next several years, supporting occupancy and rental growth, particularly in Sydney because of solid economic fundamentals, lack of supply and geographic limitations.
“We consider Sydney to be the strongest market for industrial space, given limited space availability, followed by Melbourne.”
Further compression in the industrial segment is expected, particularly for well-located industrial properties near population centres, but is unlikely in the retail and office segments given cyclical and structural challenges.
Low office vacancies to assist AREITs
“In the office space, performance remains for now supported by low vacancy rates and low near-term lease expiries, but there is a clear longer-term risk in the form of a potential structural shift to remote work that could affect demand,” Saranga Ranasinghe, a Moody’s vice president and senior analyst, and co-author of the report said.
“We expect organizations may adopt different types of office models such as the “hub and spoke” model or will reconfigure office space to meet changing demand profiles.”
However, rated AREITs with office assets will remain resilient because of the strength of the Australian office market prior to the pandemic. They have generally attracted larger and stronger tenants and lease, while their lease expiries are mostly staggered and leases mostly have built-in rental escalations that offset any losses from negative rental reversions on lease renewals over the next 12-18 months. GPT, Mirvac and Dexus were identified as beneficiaries.
More pressure on leasing conditions will arrive through a rapid increase of supply in Melbourne and Sydney over the next 12-18 months.
“In particular, by calendar 2023 substantial new supply in Melbourne could significantly reduce rental prices and asset valuations in the city,” Ranasinghe said.
The retail segment will continue to diverge between discretionary and non-discretionary spending over the next 12-18 months, with discretionary spending to improve albeit from a low base.
Tenant bankruptcies, higher occupancy costs, increasing online penetration, lower spending and the “considerable uncertainty” in the operating environment present further downside risks.
Shopping centres with high exposure to discretionary spending will improve over the next 12-18 months, but from a low base. Moody’s said that while Scentre Group and Vicinity Centres have been the most exposed to retail segment weakness, they also benefit from high quality, well-located asset bases.
GPT, Mirvac as well as Vicinity will benefit from exposure to non-discretionary retail and more resilient property sub-segments, such as industrial, while Charter Hall Retail REIT and Shopping Centres Australasia Property Group will continue to perform well because of their portfolios of neighbourhood shopping centres that enjoy stable demand.
Government stimulus helping residential
Moody’s said the outlook for single dwelling residential is improving following government stimulus and measures to facilitate access to bank lending, with single family dwellings – excluding the major metropolitan areas in Sydney and Melbourne – best placed to benefit from programs such as HomeBuilder, existing state and territory first home owner grant programs, stamp duty concessions, and the Commonwealth’s First Home Loan Deposit Scheme and First Home Super Saver Scheme.
“However, we expect the programme will not be as beneficial to home-buyers in Sydney and Melbourne, where median dwelling prices are around $1 million, well above the eligibility criteria of a national dwelling price cap of $750,000,” Moody’s said of HomeBuilder.
“Also, substantial renovations can only be applied to homes valued at no more than $1.5 million.”
Apartments will be hardest hit from the economic fallout of the pandemic, Moody’s believes. Supply was in surplus at the beginning of the pandemic, and demand has only decreased, and CBD apartments will not benefit from government grants given price caps for eligibility.
