Australian commercial property holding up against higher interest rates

Vicinity Centres

17/02/2023 01:48

By Lewis Jackson
       SYDNEY, Feb 17 (Reuters) - 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.AX , Vicinity Centres  VCX.AX 
and Dexus  DXS.AX  - 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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Australian REITs rally    https://tmsnrt.rs/412SRT9
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 (Reporting by Lewis Jackson; Editing by Christopher Cushing)
 ((lewis.jackson@thomsonreuters.com; Reuters Messaging:
@lewjackk))