Nine months into the steepest rate-hike cycle in a generation and Australia's rate-sensitive commercial real estate sector is proving more resilient than expected, say investors and analysts who believe markets oversold a sector prepared for higher rates.
Shares in Goodman Group (GMG) , Vicinity Centres (VCX) and Dexus (DXS) - which collectively manage A$120 billion ($82.60 billion) worth of shopping centres, office blocks and warehouses - rallied more than 2% on the day after reporting half-yearly earnings that defied expectations of a slump.
A reopened post-pandemic economy running hot is helping earnings for industrial and retail landlords, and occupancy rates are north of 95% and holding. Rents are rising and should help offset some of the asset mark-downs to come. While highly geared, most debt is hedged for several years.
"There was a bit of uncertainty before the results," Jade Ong, an investment specialist at the Pengana High Conviction Property Securities Fund, told Reuters. "The results have actually been quite good, most REITs are recording pretty good performances."
Real estate investment trusts (REITs) are especially sensitive to interest rates. Rising rates push up debt-servicing, and trusts looking to sell assets and reduce debt must do so as a slowing economy hits occupancy while higher capitalisation rates reduce valuations.
But after a torrid run through 2022 that wiped a third off the local REIT share price benchmark, shares took off last October as investors bet on a peak in interest rates.
Investors too hastily dumped the sector, said Grant Berry, a portfolio manager at SG Hiscock & Company. REITs learnt from dilutive capital raises after the 2008 Global Financial Crisis and today boast lower leverage, hedged debt and more modest distributions, he said.
"I don't see the skies falling in myself. This is the third event in the last fifteen years," he told Reuters. "The GFC was a terrible experience and REITs were caught wrong-footed, highly levered and with big payout ratios. There were lessons learnt."
Australia's largest office landlord Dexus has hedged 85% of its debt for an average of almost five years. Goodman Group has two-thirds locked in for three years.
Analysts and investors agree rising interest rates will make it harder to grow earnings, and results revealed higher interest bills and several portfolio mark downs. Interest costs for Vicinity and Dexus rose 8% and 19%, respectively. Dexus took a A$242 million write-down.
Office REITs already grappling with the work-from-home trend are most vulnerable, said Ong. Occupancies for premium offices are high but there are signs that billions of dollars in new developments may be harder to fill, she said.
Dexus Chief Executive Darren Steinberg has flagged there will be more interest-rate pain when the firm reports full-year results in June. His counterpart at Vicinity Centres said higher rates could slow retail sales growth in the second half of 2023. ($1 = 1.4529 Australian dollars)
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