Industrial REITs: Tenant demand remains strong but valuations smashed by rising yields

Tue 25 Oct 22, 12:13pm (AEST)
Industrial Warehouse REIT aerial shot
Source: iStock

Key Points

  • Rising interest rates and bond yields has triggered a broad-based selloff for ASX-listed REITs
  • Centuria Industrial said Australia's industrial real estate market sees strong tenant demand and record low vacancy levels

A rising interest rate environment has heavily discounted still-fundamentally-sound industrial REITs back to pre-pandemic valuations.

S&P/ASX 200 Real Estate Index heavyweight Goodman Group (ASX: GMG) is down -39% year-to-date and trading exactly where it was before the March 2020 selloff.

Likewise, Centuria Industrial (ASX: CIP) is down -34% year-to-date and -27% below its pre-pandemic high.

Business as usual

Yields aside, it's business as usual for industrial REITs.

“Strong industry tailwinds for Australia’s industrial real estate market continue with strong tenant customer demand," said Centuria Fund Manager, Jesse Curtis.

"Record low national industrial vacancy, coupled with limited supply of industrial space, continues to create a divergence between supply and demand resulting in accelerated industrial market rental growth across the country."

In the first quarter of FY23, Centuria said 49,209 sqm of lease terms were agreed, with re-leasing spreads averaging 18%. The spread refers to the difference between the new rent and the prior expiring rent over the same space. In addition, the company's new South Industrial Estate in Victoria, which is due to open in November 2022 has 100% occupancy prior to practical completion.

"Industrial property is, I think, pretty outrageously expensive, but, the rental outcomes remain very strong," notes Aequitas Investment Partners.

Bond yields versus REITs

Notwithstanding other factors that may impact the performance of REITs, the chart below shows that every time the Australian government 10-year yield takes another leg up resulted in a move in the opposite direction for a REIT name like Goodman.

Goodman Group versus 10 year bond yield
Goodman Group versus Australia government 10-year yield (Source: TradingView)

To add some perspective, Goodman, which is a more growth oriented REIT, guided towards an FY23 dividend of 30 cents per share. A yield of approximately 1.8% at today's prices. Centuria Industrial reaffirmed its FY23 guidance on Monday of 16 cents per share, or an annualised dividend yield of approximately 5.9%.

The bottom line: Surging bond yields are becoming increasingly competitive against what companies are paying out.

It seems like the million dollar question for still-sound REITs is where and when bond yields will top.

The RBA's unexpected 25 bp hike in October surprised many. But recent comments from Assistant Governor Christopher Kent said "the board expects to increase interest rates further in the period ahead, given the need to establish a more sustainable balance of demand and supply and in the face of a very tight labour market."

The near-term outlook for rates remains hawkish but 2023 remains anyone's game as central bank must weight still-sticky inflation against slowing economic growth.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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