China reopening good for residential and retail property
Residential development will get a lift from China’s reopening but the return of visitors from the world’s second-largest economy will not be sufficient to offset domestic weakness dogging retail property, says a new UBS report naming Stockland, Goodman, GPT and Lendlease as stocks to benefit.
At a time of little new apartment supply, Australia’s residential developers will benefit from returning demand from returning foreign migrants and logistics developers will also get a boost, the investment bank report says.
“We maintain a favourable view on diversified/residential developers with a preference for Stockland over Mirvac (FY23 earnings uncertainty and capital required for developments),” the 2023 Asia Pacific Real Estate Outlook report says.
“We have moderated our view on retail relative to 2022 (Scentre Group Neutral, Vicinity Centres Sell) as we head into a more difficult retail sales growth environment after a strong period of outperformance. We continue to take a cautious stance on office markets but increasingly this is reflected in share prices.”
Interest rates are rising globally and these still make the environment tough for listed property stocks but the stocks that had higher growth and lower gearing would be more resilient to higher borrowing costs, the report says.
Australia is lower down the list of countries to directly benefit from China’s reopening, with Singapore, South Korea, Hong Kong, Japan and Thailand higher up in the queue.
In any event, short-term headwinds such as restrictions on Chinese travellers and airport capacity shortages could slow the pick-up in overseas travel growth, with traffic from China only exceeding its pre-pandemic level in 2025, the report says.
Federal government agency Austrade predicts Chinese tourism to Australia will not return to pre-pandemic levels until 2026.
Nonetheless, Lendlease was likely to benefit from sales to China-based buyers of luxury apartments in its One Sydney Harbour and One Circular Quay developments in Sydney, and from selling down its China-based retirement stock, which UBS valued at between $300 milllion and $400 million.
Further, its holding in the $S3.6 billion ($3.9 billion) Singapore-listed Lendlease Global Commercial REIT further exposed the Australia-based company to a pickup in the performance of Singapore retail property from Chinese visitors, the report says.
Mirvac was likely to benefit from Australian premium apartment sales to China-based purchasers in projects such as Willoughby and Green Square in Sydney, it says.
CBD shopping centres owned by Vicinity and Scentre Group would benefit from a rise in Chinese visits, but the bank was cautious on retail.
“The broader China reopening and return of tourists and international students presents upside potential for CBD retail and ‘tourist shopper’ destinations such as Chadstone, along with inner-city apartments,” it says.
“However, we believe this will not be enough to offset the weakness of the domestic consumer on the back of materially higher mortgage rate (post resets) in 2023.”
The bank said logistics property would benefit from “excess” rent growth this year, good for companies including Goodman and ESR, but was cautious on office – and stocks such as Dexus – due to uncertainties weighing down that sector.
