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Martin Currie reckons ASX REITs could bounce back in 2023 – here’s how to spot a commercial real estate winner
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- Martin Currie said ASX REITs with pricing power could bounce back strongly in 2023
- Suburbs proving to have greater pricing power than CBD following shift to WFH
- REITS are trading at a discount to unlisted property funds, representing value
Asset manager Martin Currie reckons real estate investment trusts (REITs) could bounce back in 2023 to deliver strong returns and have picked their best ASX REITS for investors.
The sector, which owns shopping malls, warehouses and office towers, emerged from a tough couple of years of the early Covid-19 pandemic including lockdowns to another challenge with higher inflation and interest rates in 2022.
Ashton Reid, portfolio manager for real estate at Martin Currie, told Stockhead ASX REITs have faced several headwinds over the past few years falling around 20% in CY22.
“We have had Covid and lockdowns which impacted real estate assets because people stopped going about their everyday lives,” he said.
“Foot traffic in shopping centres is still below pre-Covid levels and that drives cash flows like car parking, advertising, and auxiliary income.
“And of course, rising interest rates have affected REITS because they tend to have shorter term debt and cost of that debt is repriced in quite quickly which in turn has affected dividend growth across the sector.”
Pricing power and population growth in favour of REITs
However, Reid said ASX REITs with pricing power could bounce back strongly enough to deliver investors good returns in 2023.
“In this environment we ask ourselves who has pricing power and can raise rents?” he said.
“Why have interest rates gone up because it’s a more inflationary world and so in that environment as an investor you need to ask who can accelerate the top line to outpace the higher interest costs which have come about quickly.
“We see the opportunity with those REITs that have pricing power.”
Reid said another megatrend in the favour of REITs is Australia’s strong forecasted population growth.
“Re-enforcing these strong drivers of population growth, October 2022’s Federal mini-budget saw migration expectations upgraded to 235k net arrivals in FY23 from the prior expectation of 180k, which would see population growth rebound to 1.4% year on year,” he said.
“Based on recent arrivals measures, these government forecasts may prove to be conservative.”
As a further sign of population growth, the Federal Government has increased permanent migration visas available in 2022-23 from 160,000 to 195,000 places.
“This means more users for the real assets and long-term confidence in Australian REITs,” Reid said.
Here’s a list of all ASX-listed REITs and their performance:
Swipe or scroll to reveal full table. Click headings to sort:
| Code | Company | Price | % Week | % Month | %Six Months | % Year | Market Cap |
|---|---|---|---|---|---|---|---|
| HMC | HMC Capital Limited | 4.59 | -3% | 1% | -8% | -26% | $1,383,574,867 |
| ARF | Arena REIT | 3.86 | 4% | 2% | -13% | -19% | $1,335,670,743 |
| APZ | Aspen Group | 1.85 | 0% | 2% | 14% | 21% | $331,929,381 |
| GMG | Goodman Group | 19.80 | -1% | 6% | -2% | -13% | $37,402,530,160 |
| CHC | Charter Hall Group | 14.55 | -1% | 13% | 17% | -7% | $6,853,729,414 |
| CNI | Centuria Capital | 1.85 | -1% | 0% | -5% | -37% | $1,479,624,069 |
| INA | Ingenia Group | 4.55 | -1% | 0% | -3% | -17% | $1,866,731,349 |
| GDF | Garda Prpty Group | 1.35 | -2% | -2% | -14% | -20% | $307,319,887 |
| CIP | Centuria I REIT | 3.40 | -1% | 6% | 13% | -9% | $2,139,716,240 |
| URF | US Masters Residential Property Fund | 0.30 | 9% | 13% | 7% | 7% | $221,643,376 |
| NSR | National Storage | 2.33 | -1% | 1% | -5% | -3% | $2,784,055,457 |
| RFF | Rural Funds Group | 2.39 | -3% | -2% | -9% | -18% | $906,834,885 |
| CQE | Charter Hall Soc In | 3.30 | -4% | -3% | -12% | -14% | $1,246,815,636 |
| ABP | Abacus Property Group | 2.86 | 0% | 6% | 0% | -19% | $2,520,114,525 |
| DXI | Dexus Industria REIT | 3.11 | 2% | 4% | 10% | -2% | $983,537,037 |
| HDN | Homeco Daily Needs | 1.30 | -1% | 0% | 0% | -3% | $2,692,388,550 |
| GOZ | Growthpoint Property | 3.27 | -3% | 3% | -11% | -19% | $2,497,023,269 |
| DXS | Dexus | 8.56 | 3% | 7% | -7% | -16% | $9,142,304,591 |
| AOF | Australian Unity Off | 1.66 | -1% | 0% | -6% | -33% | $271,232,671 |
| RGN | Region Group | 2.54 | -5% | -5% | -13% | -11% | $2,895,212,857 |
| CQR | Charter Hall Retail | 4.04 | -2% | 4% | 1% | 0% | $2,348,167,620 |
| HPI | Hotel Property | 3.58 | -1% | -3% | 12% | 0% | $693,640,961 |
| GPT | GPT Group | 4.62 | 0% | 5% | 7% | -9% | $8,811,656,178 |
| MGR | Mirvac Group | 2.22 | -7% | 0% | 4% | -11% | $8,759,809,682 |
| COF | Centuria Office REIT | 1.64 | -2% | 4% | -4% | -24% | $976,645,882 |
| CLW | Chtr H Lwr | 4.58 | -2% | 0% | 3% | -6% | $3,325,595,144 |
| ECF | Elanor Comm Prop | 0.93 | 0% | -1% | -8% | -16% | $292,814,627 |
| CDP | Carindale Property | 4.36 | -2% | -2% | 0% | -3% | $326,119,592 |
| NPR | Newmark Property | 1.38 | -3% | -1% | -15% | -24% | $250,674,650 |
| HCW | Healthco Health & Wellness REIT | 1.56 | -3% | -10% | -5% | -23% | $511,308,985 |
| SGP | Stockland | 3.87 | -3% | 3% | 1% | -1% | $9,309,969,482 |
| VCX | Vicinity Centres | 2.04 | -1% | -1% | -1% | 20% | $9,150,073,470 |
| WPR | Waypoint REIT | 2.71 | -3% | -1% | 6% | -1% | $1,813,904,677 |
| DXC | Dexus Conv Ret REIT | 2.79 | -3% | -4% | -7% | -20% | $384,340,811 |
| CMW | Cromwell Prop | 0.71 | -2% | 3% | -11% | -18% | $1,872,489,690 |
| BWP | BWP Trust | 3.88 | -1% | -2% | -5% | -1% | $2,492,449,156 |
| URW | Unibail-Roda-Westfield | 4.62 | -2% | 4% | 6% | -14% | $814,482,740 |
| GDI | GDI Property Grp | 0.81 | -4% | 5% | -12% | -22% | $433,247,776 |
| WOT | Wotso Property | 1.35 | -1% | 0% | 0% | -2% | $220,536,393 |
| APW | Aims Property Security Fund | 1.29 | 0% | 3% | -1% | 7% | $57,429,617 |
| TGP | 360 Capital Grp | 0.82 | 0% | -1% | 6% | 2% | $199,029,622 |
Opportunities in the burbs
Reid sees the suburbs have better pricing power than the CBD. He said while people are getting back into the city after lockdowns, with the fallout from Covid, people have changed their behaviour since the pandemic.
“People are working from home more, spending more time in the suburbs so those assets exposed more to the suburban areas their tenants have done better in this Covid period and even with reopening still doing well,” he said.
REITs in the burbs can be classified into three categories including:
1. Everyday retail
2. High-end discretionary
3. Industrial
Everyday retail a standout
Reid said REITs in this sector which stand out include:
• Region Group (ASX: RGN), formerly Shopping Centres Australasia Property Group (ASX:SCP)
• Charter Hall Retail REIT (ASX:CQR)
• HomeCo Daily Needs REIT (ASX:HDN)
Reid said these REITs are underpinned by big supermarket tenants like Coles or Woolworths but also have specialised tenants.
Currie said when talking about REITs it’s good to look at tenants and particularly the performance of tenants.
“It’s about looking at can your tenants afford a higher rent?” he said.
“It’s about like if you are renting an apartment and the landlord wants to raise the rent – can you afford it?”
For RGN, CQR and HDN the tenant sales in some cases are 10-15% higher than 2019 levels.
“That means when you come to renegotiate rents you have strong pricing power so you can accelerate rent and that’s what we are seeing,” he said.
“They have the heat of higher interest costs but they’re now growing their rents at a faster rate.”
He said CQR also has a portfolio of petrol stations as well as everyday needs retail with those leases linked to CPI.
“Because CPI is higher, they are accelerating their rents.”
Higher end discretionary
Reid said the high-end discretionary malls such as Westfield owned by the likes of Scentre (ASX:SCG) and Vicinity Centres (ASX:VCX) are also worth watching.
“In that bucket tenant sales are broadly up 25% on 2019 levels because consumer spending has been strong and savings high because people could travel overseas,” he said.
“When it comes to renegotiating a lease, the landlord is in a strong position to raise rents to match those higher costs of debt.”
Industrial rents up as demand grows
Reid said industrial real estate has done well during Covid, flagging a need for more logistics space as e-commerce has grown in popularity.
“There’s been more need for logistics space and that is an ongoing theme,” he said.
“Industrial rents are up strongly with new leases signed in industrial spaces which have expired from five years ago anywhere from 30 to 40% higher.”
Reid said among REITs in this space is GPT Group (ASX:GPT), which also owns shopping centres including Melbourne Central and High Westfield Penrith malls, and has a large logistics and office portfolio.
There’s also National Storage REIT (ASX:NSR) and Abacus Property Group (ASX:ABP) which owns Storage King.
For diversity the BetaShares Martin Currie Real Income Fund (ASX:RINC) is an actively managed fund mixing REITs, infrastructure and utilities to give investors exposure to the megatrend of population growth.
“That’s why we like the suburbs with everyday retail, high end malls and industrial – they all have strong pricing power to combat the headwind of higher costs of debt,” Reid said.
CBDs have a case of Long Covid
The city centres though are still struggling with structural change since the start of the Covid-19 pandemic, including working from home.
“The big users like banks or tech are allocating more people to the same amount of space because they don’t have everyone in at the same time and it’s a global trend,” Reid said.
“The biggest fallout has been the big users rather than the smaller businesses and so again our preference is for offices that are a bit more suburban and has smaller tenants.
“The big end of town is definitely under more pressure because if you increase supply it’s harder to raise rents.”
REITS vs unlisted property funds – voice of the many
Are the REITs priced fairly and do they represent good value? Reid said it’s good to compare the price of REITs to unlisted direct property funds.
“I use the phrase ‘the voice of the many’ because unlike an unlisted fund these REITs are trading every day and don’t just get a single valuer’s opinion,” he said.
“You have many people deciding what the listed properties are worth so there’s a lot more liquidity and transparency with a listed pricing compared to unlisted world.”
Reid said the biggest opportunity is in the discrepancy between the listed and unlisted property funds.
He said looking at the net tangible assets (NTA), which is the book value or unlisted value of a REIT which valuers would use, the REITs represent a good buy.
“The REITs are trading at a discount to those NTAs and that is biggest in the office space where it’s up to 35%,” he said.
“But even in retail space the discounts to the unlisted world are between 10 and 15%.”
Reid said it’s not to say REITs are perfectly valued and the unlisted world is wrong but there is a big difference between the two and that’s the opportunity in the listed world.
“If you could sell unlisted and buy the REITs there is a good opportunity there,” he said.
“In terms of another catalyst for REITs to perform in 2023, corporate activity and a takeover of the value REITs could also be something to look out for which we have seen play out in overseas markets.”
If we’ve missed a REIT in our table please let us know. Email [email protected]
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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