ASX REITs to Watch as the US Federal Reserve Cuts Interest Rates | Moomoo Research
Australian Real Estate Investment Trusts (A-REITs) offer investors a way to engage in the commercial real estate market without directly holding physical property. These A-REITs own, operate, or finance a range of real estate sectors, generating income as a result.
Is it the right time to invest in A-REITs amidst US Federal Reserve rate cuts? To answer this, we need to look at three questions:
1.How is the US Federal Reserve's rate cut related to A-REITs?
2.What is the outlook for Australian real estate?
3.Which types of A-REITs should you invest in?
Is now a good time to buy A-REITs?
A-REITs' income primarily comes from rental income from their properties. Since A-REITs typically distribute most of their earnings as dividends to shareholders, they are an attractive option for investors seeking stable income.
Currently, the expectation of a rate cut by the Federal Reserve has resurfaced. According to the CME FedWatch tool, traders are betting on a 25 basis points rate cut by the Federal Reserve in September. Debt costs are a critical factor in real estate as they influence the amount of debt investors can afford and their repayment situation. So, how does a Federal Reserve rate cut impact Australian real estate?
Although Australia's and the USA's interest rate cycles and economic drivers are different, the current market expects the Reserve Bank of Australia to cut rates by 2025. However, Australian real estate stocks could still benefit from changes in the U.S. yield curve.
The S&P/ASX 200 A-REIT is an industry index focused on Australian A-REITs, designed to track the performance of the Australian REIT market. As shown in the figures below, periods like 2014-2016 and 2018-2019 saw the S&P/ASX 200 A-REIT index rise in conjunction with the decline in U.S. Treasury yields, indicating a strong correlation between U.S. Treasury yields and the performance of Australian REITs.
Source：Market index
Source：moomoo
Moreover, Australia's inflation rate is declining, albeit slowly. This could prompt the Reserve Bank of Australia to start cutting rates at some point in the future. Generally, REITs tend to rise 0-4 months ahead of rate cuts by the central bank. This is why the S&P/ASX 200 A-REIT index has risen by 18% so far this year.
The performance of A-REITs is closely related to the real estate market. Factors like economic recession, oversupply in real estate, or falling rents could negatively impact A-REITs. So, beyond macro factors, what is the outlook for the Australian real estate market?
What is the outlook for the Australian real estate market?
Over the past three years, amid high inflation rates, Australian real estate prices and rental incomes have continued to rise. The housing supply has not been able to meet buyers' demands. In 2023, the number of new homes built in Sydney fell by 42% compared to 2018, exacerbating the supply crisis in the housing market.
Demand remains strong, supported by low unemployment rates and an influx of overseas immigrants, especially international students and temporary visa holders. With rising central bank rates and overall living costs, landlords are under significant pressure to raise rents, leading to lower vacancy rates. All capital cities have rental vacancy rates below 2%.
Source：Domain
The table below shows the average rent in each capital city and the increase over the past year. According to Domain, as of June 2024, rent prices in Australia's capital cities have risen by 11.1% over the past year.
Source：Domain
With tight supply and strong demand, property prices naturally rise. Some real estate stocks on theAustralian Securities Exchange(ASX) currently have valuations less affected by high interest rates. If these stocks maintain high occupancy rates and continue to generate strong rental profits, leading to robust dividends, the current valuations of some depressed assets could present opportunities.
Not all A-REIT categories are worth investing in
The 46 A-REITs listed on the ASX provide investors with diversified real estate investment opportunities, including office buildings, shopping centers, industrial properties, as well as niche sectors like data centers, healthcare facilities, and pubs. However, their performance in FY2025 may vary.
Strong Demand for Industrial Properties
As companies move more supply chains to limited capital cities, the demand for industrial properties remains robust. In FY2025, rental growth in this sector is likely to continue strongly. According to the latest report from CBRE, the total value of Australia's industrial property market has more than doubled in under three years, soaring to nearly AUD 300 billion.
The rapid growth of industrial properties is mainly driven by the rise of e-commerce, leading to increased demand for transportation and logistics services, as well as supply chain shortages. These supply shortages have driven vacancy rates to historic lows. Since the second half of 2019 (pre-pandemic), the national vacancy rate for industrial and logistics spaces has been on a downward trend.
Office Buildings Will Continue to Face Pressure; Suggest Avoidance
Post-COVID-19, people still prefer to work from home rather than return to offices, leading to declining tenant demand and higher vacancy rates for office buildings, especially in Melbourne and Sydney.
For instance, Dexus, a representative REIT company, recently disclosed a net loss of USD 1.58 billion for FY24, mainly due to a USD 1.9 billion write-down in its office building portfolio, resulting in double-digit percentage declines and a significant drop in valuations. The office building market could face more pressure in FY2025.
Retail and Shopping Centers Remain Resilient
Australian consumption remains generally resilient. Strong population growth, low unemployment rates, and wage growth—the "threefold drive" will support the retail market. The supply of shopping center space is also tightening, which could lead to higher store rents.
CBRE stated in a recent report that from 2024 to 2028, future shopping center supply will total 780,000 square meters, which is less than half the historical average. Moreover, shopping center vacancy rates are very low. Currently, the vacancy rate for Australian shopping centers is below 5%, and as vacancy rates tighten and shopping centers continue to attract foot traffic, rents are expected to keep rising.
Therefore, we can focus primarily on the industrial sector, followed by the retail sector A-REITs, and avoid office-type REITs.
REITs Worth Considering
Given that there are many A-REITs listed on the Australian Securities Exchange (ASX), it can be challenging to pick individual stocks. One option for investors is to consider an A-REIT ETF, such as SLF, which offers diversified exposure to the real estate market by tracking the performance of the S&P/ASX 200 A-REIT index.
Based on the potential returns and market activity of Real Estate Investment Trusts (REITs), we provide a brief overview of the following REITs:
Industrial Properties: Goodman Group (ASX: GMG), Centuria Industrial REIT (ASX: CIP)
Retail Properties: Scentre Group (ASX: SCG), Charter Hall (ASX: CHC)
Goodman Group (ASX: GMG): Growth Driven by Data Center Projects
Goodman Group focuses on the investment, development, and management of industrial properties and is Australia's largest industrial real estate company. According to its annual report, its occupancy rate remains high at 97.7%.
Digital center projects are the drivers of future growth. The company is preparing projects worth USD 13 billion, with nearly 40% related to data centers—a sector currently experiencing high growth. According to Statista, the Australian data center market is expected to grow annually by 5.1% by 2029.
The distribution per security is 30.0 cents for FY24, consistent with previous years, and the current dividend yield is 0.85%.
Centuria IndustrialREIT(ASX: CIP): Strong Growth in Re-leasing Spreads
Centuria Industrial REIT (ASX: CIP) remains the only REIT on the Australian Securities Exchange (ASX) that focuses solely on domestic, pure industrial properties.
According to the company's announcement, as of FY2024, it has achieved approximately 50% re-leasing spreads, meaning that rental income from new leases for the same property has increased by 50% compared to old leases. This is a strong growth indicator, showing robust demand and increased value for logistics properties.
As of December 31, 2023, the Net Tangible Asset (NTA) for this business was AUD 3.89, which means Centuria Industrial REIT's stock price is at a 16% discount to this value. The current dividend yield is 5.1%, and ongoing double-digit rental growth can provide funds for higher distributions in the coming years.
Scentre Group (ASX: SCG): Occupancy Rate Nearing 100%
This Australian company focuses on the retail commercial real estate sector, particularly known for its investment, development, and management of shopping centers. As an industry leader, Scentre Group has a vast network of 42 shopping centers, primarily located in the city centers of Australia and New Zealand.
The company benefits from strong consumer foot traffic and high occupancy rates. Although retail cannot escape economic cycles, Scentre's diversified tenant base and strategic locations allow it to benefit from the growth in commercial real estate valuations.
In Q2 2024, its occupancy rate was nearly full at 99.3%. The dividend yield is 4.5%, and Scentre Group expects its Funds From Operations (FFO) to grow by up to 5.4% in 2024, with distributions expected to increase by at least 3.6%.
Charter Hall RetailREIT(ASX: CQR): Attractive Dividend Yields
Focusing on the supermarket-anchored community and sub-regional shopping center market, Charter Hall Retail REIT has the highest dividend yield among the top twenty A-REITs by market cap. The company's rents are linked to inflation. The company announced dividends of 27.4 cents per share for FY2024 and 25.4 cents per share for FY2025. Based on the current share price of AUD 3.67, this translates to attractive dividend yields of 7.65% and 7.1%, respectively.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Nisdey : There is only 1 way the RBA will cut rates in 2025, and that's if the corrupt Albanese government legislated away their independence and stacks the RBA board with union organisers. (this is their current plan to reduce interest rates, since they refuse to cut government spending to lower inflation).
The disconnection of interest rates from inflation to trick voters into giving this lunatic another term in office, combined with the absurd spending on "renewables" and "infrastructure" all of which is 100% inflationary (since neither generate any revenue) guarantees that REITs as well as any other deflationary asset (like gold, or Bitcoin) will skyrocket.
Since the underlying cause will be hyperinflation in the AUD, holding literally anything that is not denominated in AUD, like US dollars or stocks will also "skyrocket" if viewed through the lens of Australian Dollars.
This might sound like a way to get rich while everyone else gets poorer, but it doesn't work like that in Australia.
Here, we believe in Survival of the Weakest. A form of anti-evolution.
FACT: the average NDIS participant receives "benefits" equivalent to nearly double the average workforce participant's before-tax income. Who's better off working? Not many.
DM me for advice on SMSFs and offshore holdings, to limit your exposure to the "Robbin Hood" taxation scheme that's coming out way.