This article is from the Australian Property Journal archive
COMING into reporting season, financial service firm UBS believes the A-REIT sector is fair value at current interest rate levels from a top-down perspective.
In a note to clients, analysts Grant McCasker, Tom Bodor and Cody Shield said from the top-down perspective the implied cap rate spread to bonds is 249 basis points, slightly above the 227 basis points seen in a higher bond rate (greater than 4%) environment; while P/FFO against real bond yields is in line with historical pricing.
From a bottom-up view, valuation metrics suggest the sector is around 10% below fair value reflecting premium/discount to net tangible assets of -14%s – excluding Goodman Group and Charter Hall – below the long-term average +5%, while EBITDA/EV is at 6.3% , just above average, P/E is 13.8x, below the historical average of 15.1x, and the discount to UBS derived NAV is -6%.
UBS is expecting five sector themes to be apparent this month. The analysts said they anticipate conservative guidance versus its expectations, despite UBS expectations being 3% below consensus, with management likely to adopt a buffer to bank bill swap rate assumptions and caution around pending developments, transactions and costs, with buy-side expectations increasingly adjusted.
They also expect expense inflation will be elevated at 5% to 12% with triple net leases best placed; for valuations, pending transactions are providing evidence for further valuation declines with investors looking for the trough – office is most at risk, with A-REIT pricing at a 15% discount to NTA, they believe.
Ongoing de-leveraging is expected through non-core asset sales, and interest expense is subsiding as a headwind with three and five-year swap rates now roughly in line with the floating rate. UBS expects a peak floating rate of 4.5%, at around 6% debt cost.
For the retail sector, the analysts said UBS data confirms that the “consumer crunch” has started but this may be less evident in results, with only recent trading showing signs of deterioration.
They see relative affordability as key for residential, driving preferences towards apartments and manufactured housing estates and away from house and land. For the office sector, they said that despite apparent value “we see few catalysts, a shallow bid for assets and continued concerns around longer-term structural (working-from-home) and cyclical (unemployment) leasing drivers”.
Industrial and logistics remains the “preferred sub-sector with very strong fundamentals, although we’re monitoring any signs of growth moderating”.
For funds managers the analysts see investors positioning for peak interest rates, but “likely disappointment” as lacklustre equity flows and limited gearing capacity in funds limits a recovery/growth.
UBS is below consensus predominantly due to funds managers HMC Capital (-13%), Centuria Capital Group (-11%), Charter Hall (-5%) and Ingenia Communities Group (-5%). Excluding Goodman, UBS’s expects funds from operations to be 2% lower from FY23 to FY24 – including Goodman Group, this becomes +1%).
“While we think it its too early to be overweight REITs, we expect renewed investor interest heading into a rebased FY24 as income starts to look increasingly defensive and the pace of valuation declines slows into June 2024,” the analysts said.
Large-cap buy-rated names are Goodman, Mirvac, GPT and Lendlease. It is neutral rated on Charter Hall, DXS, Scentre Group and Stockland and Sell rated on Vicinity Centres.
“Heading into FY24, we have a preference for: 1) REIT business models prepared for ‘higher for longer’ rates (Goodman); 2) REITs with resilient income (GPT, HomeCo Daily Needs REIT, Centuria Industrial REIT, Charter Hall Retail REIT); and 3) relative affordability within housing (Mirvac).
“Our underweight sectors are:1) fund managers (Charter Hall, Centuria Capital Group) reflecting underwhelming performance versus expectations, 2) large-cap retail (Scentre Group, Vicinity Centres) as the consumer slows and capex exceeds company guidance and 3) a more moderate underweight view for office where we see tepid demand from both occupiers and capital.”
