Interest rate drop augurs likely A-REITs rebound

A-REITs investors could see a long-awaited stock bounce this year, as falling inflation and interest rates shift momentum back to the property market, according to a leading property market expert.

Amy Pham, portfolio manager for Pengana’s High Conviction Property Securities Fund, says AREIT stock earnings are forecast to grow between 3% and 5% this calendar year.

“This is encouraging as A-REITs are considered relatively defensive, due to lease structures and minimal exposures to operational risk,” Pham said.

“While markets have been unpredictable in recent years, we’re already seeing some increased signs of confidence given we’re now at the start of a new interest rate cycle.”

Already, Pham noted, certain A-REITs were already showing positive sales growth prior to the most recent rate cut, including from leading commercial property developers Mirvac and Stockland.

“Even if the rate cuts aren’t that deep, there has already been a shift in momentum among residential, particularly at the more affordable end of residential property,” she said.

Pham said the firm is also positive about land lease communities and retirement living.

While some office property shows signs of “green shoots”, Pham said, she cautions that it may still be too early to be bullish on office as a whole. High vacancy rates and incentives remain a drag on the sector, Pengana warns.

“Office transactions seem to have picked up, which provides more evidence regarding the true valuation of [the] office sector, and gives us confidence we are sitting at [the] bottom of the valuation cycle.

“One thing we look at is free cash flow and incentives are still very high, so free cash flow is quite poor.”

Due to the ongoing uncertainty, Pengana remains underweight on office investments, but is “seeing some green shoots” among higher-quality, premium office assets.

Pham notes that the Sydney vacancy rate for premium office is only 6% compared to the market at 15%.