Morgan Stanley: ASX 200 REITs to trend higher over the next 12 months
The global rate cutting cycle will push REIT valuations higher, according to Morgan Stanley.
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Mentioned
KEY POINTS
- The global central bank easing cycle and falling inflation will support higher real estate valuations over the next 12-18 months, according to Morgan Stanley
- REIT stocks may trade above Net Tangible Assets (NTA) in a downward rate environment, reversing the recent trend of trading at significant discounts to NTA
- Morgan Stanley recommends GPT Group, Scentre Group, and Charter Hall for investors seeking exposure to potential rate cuts in the Australian REIT sector
The expected decline in global interest rates and bond yields has set the scene for real estate valuations to trend positively over the next 12-18 months, according to Morgan Stanley.
"We think it is realistic to expect that in a downward rate environment, companies will start trading above NTA, or in the least, closer to NTA than the past two years," the analysts said in a note on Thursday.
Net tangible assets (NTA) is a valuation metric used to assess the value of a company's physical assets after deducting liabilities. It is particularly relevant for real estate companies, where tangible assets (e.g. property) make up the majority of the company's value.
Twelve months ago, the real estate stocks were trading at an average discount of 20-25% to NTAs, indicating poor investor confidence in property markets and rising interest rates.
Historically, REIT valuations have traded close to 1.0x NTAs. However, "they rarely trade in-line for any extended period, but rather above, or below. We think we could be heading into a period of above average NTAs," says Morgan Stanley.
Falling yields, higher NTAs
Using GPT Group (ASX: GPT) as an example, the analysts noted that:
GPT has averaged a share price/NTAs of 0.95x over the past decade
Its range within one standard deviation is quite wide, at 0.78x and 1.12x
The spread indicates that when interest rates are expected to move down, the market would coincidentally anticipate cap rates to compress and asset values to increase in the future
This anticipation and periods of lower rates results in stocks trading at a premium to NTAs
The below chart compares GPT Group's share price/NTA against the Australian 10-year bond yield (inverse). The chart reiterates:
GPT and the broader REIT sector rarely trades near a 1.0x price/NTA
It either trades at a premium or discount
During periods of falling bond yields and interest rates (2013-2019), GPT generally traded between 1-1.3x its price/NTA
GPT has not traded at a price/NTA of more than 1x since 2019 amid rising bond yields and the global hiking cycle
Source: Morgan Stanley Research
State of Play for ASX REITs
The analysts raised their target prices for REITs across the board, highlighting GPT Group (ASX: GPT), Scentre Group (ASX: SCG) and Charter Hall (ASX: CHC) as top picks for investors seeking to capitalise on the rate cut theme.
However, it's important to note that many real estate stocks have already seen significant gains of 30-50% since bond yields and inflation trends peaked in November 2023. While Morgan Stanley may see risks skewed to the upside, a large portion of this move may already be priced in.
Overweight Rated Stocks
Price as at 30 September 2024 close | Source: Morgan Stanley Research
Equal-weight Rated Stocks
Ticker | Company | Price | Price Target | % Dif |
|---|---|---|---|---|
Centuria Industrial Reit | $3.20 | $3.85 | 20.30% | |
Charter Hall Retail Reit | $3.61 | $4.15 | 15.00% | |
Mirvac Group | $2.15 | $2.45 | 14.00% | |
Charter Hall Long Wale Reit | $4.00 | $4.55 | 13.80% | |
BWP Trust | $3.75 | $4.25 | 13.30% | |
Homeco Daily Needs Reit | $1.25 | $1.40 | 12.00% | |
Arena Reit. | $4.16 | $4.65 | 11.80% | |
HMC Capital | $8.20 | $8.80 | 7.30% | |
Lendlease Group | $7.10 | $7.35 | 3.50% |
Price as at 30 September 2024 close | Source: Morgan Stanley Research
Under-weight Rated Stocks
Price as at 30 September 2024 close | Source: Morgan Stanley Research
