UBS tips mid-cap ASX real estate stocks to outperform large cap favourites this reporting season

The ASX-listed property sector enters FY25 reporting season with solid long-term fundamentals but several near-term headwinds that could temper performance, according to UBS analysis.

While the broker remains optimistic about the macro environment for A-REITs, citing strong rent growth, declining interest rates and limited supply, it warns that high expectations, company-specific challenges and valuation concerns may weigh on results.

Strong Growth Outlook Underpinned by Rate Cuts

UBS forecasts robust growth for the A-REIT 200 (ex-Goodman Group and Charter Hall Group) of 5.1% in FY26 and 4.9% in FY27, driven by continued rate cuts and the rolloff of interest rate hedging.

The investment bank's forecasts assume a terminal interest rate of 3.6%, which it considers conservative compared to market pricing of 3.3% by December 2025. Each 50 basis point change in rates translates to approximately 2% impact on earnings in FY26 and 3-4% in outer years.

Mid-Cap REITs May Offer Better Value

Despite the positive macro backdrop, UBS suggests investors may find better opportunities in overlooked mid-cap passive REITs rather than large-cap favourites. The broker identifies eight stocks outside the large-cap space – ARF, CIP, CLW, CNI, COF, HDN, NSR and RFF – offering greater than 4% earnings growth from FY26-29 at reasonable valuations.

This preference reflects concerns about high expectations among favoured names including Goodman Group, Stockland, Mirvac and Vicinity Centres, as well as company-specific headwinds affecting others.

Valuation Picture More Nuanced Than Headline Numbers

While the A-REIT 200 trades at a 5% premium to net tangible assets (ex-GMG and CHC), the underlying picture is more complex. Only five companies in UBS coverage are trading above asset backing, while ten names representing 46% of sector market capitalisation trade below NTA despite valuations likely having troughed.

The sector trades at a 6.2% discount to UBS price targets, with the next-twelve-months price-to-earnings multiple of 15.1 times only slightly above the long-run average of 14.8 times. The spread between implied capitalisation rates and 10-year bond yields has narrowed to 179 basis points from the typical 229 basis points observed in higher rate environments.

Key Themes for Results Season

Company-Specific Challenges: Dexus faces ongoing APAC litigation issues, while HMC confronts negative momentum and Lendlease deals with wholesale redemption windows and funds risk.

Operational Focus: Investors will scrutinise leasing spreads, occupancy rates and development progress across the sector, particularly as companies navigate the transition from higher to lower interest rate environments.

Capital Management: Balance sheet positioning, debt refinancing and divestment strategies will be key themes as companies manage leverage while pursuing growth opportunities.

UBS Expectations and Guidance

Source: UBS