Sebastian Stevens, Partner-in-Charge, Corporate Finance, BDO
ASX listed properties took a hit to valuations last financial year as large macroeconomic trends reduced confidence, but valuation fundamentals remain strong.
According to the latest BDO Australia A-REIT survey, A-REITs have lagged the S&P/ASX 200 Index by 5.1 per cent after enduring the impact of the worldwide pandemic and now rising interest rates and inflation.
The survey, in its 28th year, found all property markets delivered negative returns in FY22, a “stark contrast to the remarkable performance delivered in FY21”.
Sebastian Stevens, Partner-in-Charge of BDO Sydney’s Advisory Group, said while macroeconomic trends impacted sentiment and likely cap rates, property fundamentals remain “strong” with earnings not being impacted in the same way.
“I think what’s happening here is more macroeconomic trends are leading to the market getting nervous and repricing,” he said.
“The fundamentals are still reasonably strong.”
Mr Stevens said the Australian REIT market was sophisticated and well developed and noted strong personnel in listed companies help them remain resilient.
Improved rental yields will aid in transferring inflationary pressures on to tenants for highly leveraged A-REITs battling to alleviate higher borrowing costs, the report found.
The report noted that inflationary pressures can be addressed in A-REITs with lower weighted average lease expiries (WALE), such as hotels, self-storage facilities, and flats, by promptly modifying rent through frequent resets.
Inflation-adjusted rental increases can be built into new leases by A-REITs with higher WALEs, such as retail and office. As a result, the report said A-REITs’ capacity to modify their income streams on a regular basis will help to stabilise performance and give investors with more distribution certainty.
Mr Stevens said many REITs took the opportunity in the low interest rate environment of FY22 to use bolstered war chests to consolidate.
FY22 saw 29 transactions completed for a total value of $7.8 billion, an 85.7 per cent improvement on FY21 total transaction value.
Alternative real estate assets such as early education, senior housing, and healthcare are expected to be in high demand at any stage of the market cycle, according to Mr Stevens.
“What I do see is the rise of the alternatives,” he said.
“There’s some niche REITs, and at some point, those REITs need to get some size and scale because that’s where you get economies of scale. Fast forward, that’s where the next wave of consolidation probably happens.”
Another big trend in FY22 was ESG, which Mr Stevens said is a big must have for global funds and said Australian companies will need to adapt to this heightened demand.
While it isn’t all “doom and gloom”, according to Mr Stevens, there will be a period of taking stock while nerves are high.
“If we can get past that, I think the fundamentals are really strong,” he said.