Listed property stocks: four things to watch in results season

But the heavily anticipated cut in interest rates – which could begin later this month – could be among the triggers for a recovery across the real estate investment trust sector, analysts and fund managers say.

Big property companies including residential developers Mirvac and Stockland, industrial powerhouse Goodman, shopping mall owners Scentre and Vicinity, fund manager Charter Hall, and major office landlord Dexus, will report their earnings over the next three weeks.

“We are very excited because we think that there are a few things that are going to work in terms of making the REIT sector more attractive,” said Amy Pham, portfolio manager at Pengana Capital.

“On a risk-adjusted basis, REITs are looking really cheap compared to global equities and general equities. We’re entering a rate-cutting phase, all of that is going to help with the valuation of REITs and make them more attractive.

“There are a few turning points for us. If you position your portfolio, if you’ve done your research, you can generate alphas,” she said. “This is the time.”

So, what should investors be looking out for this earnings season?

Debt and expenses

Listed property stocks are typically viewed as defensive stocks, reliably delivering a steady flow of distributions to their investors, underpinned in a large part by property income.

But the higher cost of finance as well as property maintenance and soaring insurance costs have eaten into income over the past two years.

That means the property companies’ own assumptions for finance costs over the next year or more will be carefully scrutinised by fund managers and analysts. A big factor is the bank bill swap rate, a key benchmark for the price of debt.

“What their forecasts are for the BBSW and possibly, what they think will happen to margins [applied to finance arrangements] as well: that will be the inflection point,” one fund manager told The Australian Financial Review.

Valuations

Along with weaker earnings, the REITs’ portfolio valuations have been hit hard by high interest rates. Most dramatic has been the effect on valuations, where even major CBD office towers have been written down by 25 per cent or more.

The benchmark for that devaluation cycle has been the capitalisation rates, or cap rates, applied to portfolios.

Cap rates, akin to an expected investment yield, have steadily expanded or “softened” over the past two years as bond yields and interest rates rose, pushing asset values down as a result. Cap rates for prime Sydney office towers rose to just over 6 per cent last year from about 4.4 per cent in early 2022, when office tower values are considered to have peaked.

But many experts are hopeful the devaluation process is nearly done. Whether cap rates rise further will also be closely monitored this earnings season.

So too will be the level of demand that landlords report from corporate tenants for their office space, especially after the broad embrace of flexible working.

“We know that valuations have bottomed because the 10-year bond has stabilised, but operationally what we are looking out for is for [leasing] incentives to do down and also for vacancy to fall,” Ms Pham said.

Residential development

Despite a national shortfall in housing, construction of new homes slowed dramatically as construction costs climbed and new buyers baulked at high home loan costs.

But that could all change as aspiring home buyers gain confidence from the expected fall in interest rates. Home builder’ enquiry rates and their forecasts for sales and settlements will all be key indicators this season.

But it’s not all about interest rates, according to Pengana’s Ms Pham. There are already very favourable conditions for residential development: strong population growth, low unemployment, and a shortage of housing.

“The way we have positioned the portfolio is that we are very favourable to the residential themes,” she said.

“But we’re not positioning the portfolio based on a rate cut – we’re not economists. There are structural drivers for sustainable growth and a rate cut will be just a bonus.”

However, one potential drag on the housing sector is the looming federal election, according to another fund manager, who warned that home buyers often prefer to wait on the sidelines until there is policy certainty following the national ballot.

Earnings growth

As the tide turns in favour of real estate, expectations for earnings outlooks are also rising.

Citi analyst Howard Penny expects commentary from at least some major property companies on “the foundations being put in place for growth into 2025 and 2026”.

While there will still be “laggards in the sector” – weighed down by finance costs, high cap rates and funds management businesses saddled with the need to fund redemptions – there may also be some “upside surprises”, he wrote in a recent client note.