Business

REITS and rate rises: Views diverge over impact



JP Morgan analysts are taking a sterner view, decreasing sector valuations by a median 6 per cent given the rising longer-term bond charges on which REIT funding is normally priced.

Inflation-adjusted “real” yields are most vital to the sector, versus the quoted nominal charges. JP Morgan notes that actual Australian 10-year authorities bond yields have risen 140 foundation factors thus far this yr, to 0.9 per cent, their highest stage since 2018.

The agency notes that inflation helps REITs resembling Scentre Group, Charter Hall Retail, Carindale Property Trust and Bunnings landlord BWP Trust, which have CPI-linked lease critiques written into their lease agreements.

The proprietor of Westfield malls, Scentre Group, has annual lease escalators of inflation plus 2 to three per cent on lots of its specialty leases.

About half of the Charter Hall Long WALE (weighted common lease expiry) REITs’ diversified tenancies are inflation linked.

“The inflation kicker offsets most – if not all – of the earnings drag from higher interest costs,” JP Morgan says.

The sector’s efficiency additionally relies on the portion of funding that has been hedged at extra beneficial charges.

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Macquarie says that assuming 70 per cent hedging, the theoretical value of debt has risen from its low level of 1.2 per cent in December to three.4 per cent at present spot charges.

“Using market pricing for interest rates, between 2022 and 2024 we estimate up to a 20 per cent earnings headwind from a higher cost of debt.”

The agency provides that the upper value of debt can also be more likely to stymie acquisitions and developments.

Meanwhile, UBS’s actual property crew contend that if the market is pricing rates of interest accurately, the sector’s free funds from operations (FFO) will cut back by 8 per cent within the 2023-24 yr, which “implies further downside and … justifies many investors remaining underweight”.

According to Morgan Stanley, the “least desirable” REITs are these with low hedging cowl and the next ratio of curiosity funds to earnings (low curiosity cowl).

The agency assesses GPT Group, Stockland, Arena REIT and BWP Trust as being “perhaps in the best position”, having a big hedge place and low gearing.

An investor in “real” property resembling procuring centres, toll roads and utilities, the Martin Currie Real Income Fund cites the attraction of Scentre as foot site visitors recovers within the late pandemic.

“Strong tenant occupancy trends translate into the power to push up rents as tenant sales grow,” says portfolio supervisor Ashton Reid. “The company’s recent results demonstrated a strong ability to maintain yields.”

The fund has additionally decreased its publicity to holders of CBD workplace property, resembling Mirvac Group and Dexus Group.

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