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REITs
Looming asset revaluations a key risk for ASX-listed REITs: Morgans
By
Kerry Sun
Wed 09 Nov 22, 2:30pm (AEST)
Source: iStock
Stocks in article
Key Points
- Most ASX-listed REITs are trading at a significant discount to NTA, according to Morgans
- Cash collections, occupancy and leasing conditions remain solid as covid-related impacts ease
- Morgans expects asset revaluation news to begin later this year. To what extent has this already been priced-in?
Morgans says inflation is generally a positive for REITs but the uncertainty around impacts to asset values due to high interest rates remains a key drag heading into 2023.
The real estate sector has drastically underperformed the ASX 200, down -24% year-to-date compared to the broader market's -7.8% decline.
XJO (Orange) versus ASX 200 Real Estate Index (Source: TradingView)
The sharp re-rate coincides with bond yields (Australian 10-year) rallying from 1.7% at the beginning of the year to a peak of 4.2% in October.
Here are the key takeaways from Morgans' review of the sector and recent company quarterlies.
September quarter trends
Office and traditional retail: "Remain cautious given ongoing structural headwinds/potential softening consumer environment."
Mirvac on office and retail: "Occupancy has lifted in our prime office portfolio while retail sales are back now above pre-COVID levels at most of our assets ... [Retail is showing] accelerating signs of a recovery from students, tourists and CBD workers."
Dexus on offices: "Leasing conditions showed some signs of improvement during the quarter. Flight to quality remains a key theme and many customers continue to upgrade and centralise their occupancy."
FY23 outlook
The market is already factoring in newsflow about softening asset valuations for later this year and through 2023, says Morgans.
This has been reflected in the sharp downward re-rate for the real estate index and how most "most REITs are trading at large discounts to net tangible assets ."
"Most REITs have provided FY23 guidance which has aimed to factor in higher interest costs, conservative leasing up assumptions and no transactional activity."
It was observed that most quarterlies reiterated guidance.
"We expect next newsflow around revaluations as at December 2022 leading into February reporting season," the broker added.
Preferred REITs
Morgans' preferred REITs under coverage include:
REIT sub-sector | Ticker | Company | Rating | Target price |
|---|---|---|---|---|
Convenience retail | Homeco Daily Needs | Add | $1.56 | |
Convenience retail | Waypoint | Add | $2.93 | |
Pubs | Hotel Property Investments | Add | $3.74 | |
Health/Childcare | Healthco Healthcare and Wellness | Add | $2.16 | |
Industrials/Logistics | Dexus Industria | Add | $3.25 |
Source: Morgans | Table: Market Index
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