Finance

Can property stocks recover after a dismal May?

Many Australian listed property equities have lost 17 percent this year following the Reserve Bank of Australia’s decision to boost its official cash rate earlier and higher than predicted in May. The rise in bond rates took its toll on the industry at the start of the year. With regards to the S&P/ASX A-REIT 200, the sector’s most important index, has fallen around 5%, while the overall stock market has lost approximately 4.5% year-to-date. REIT prices tend to fall as bond rates rise as a result of their role as bond proxies. With borrowing costs for the highly leveraged industry rising, REITs took a second beating in May, falling roughly 10% so far this month.

According to their research of prior rate cycles, REITs generally rebound within two months of the first rise in interest rates. Despite their high liquidity, property stocks have lagged the market by 13% this year. On the other hand, demand in the direct market remains steady. One of the country’s largest office transactions, for $2.1 billion, is the recent purchase of Melbourne’s Southern Cross towers by Charter Hall and GIC.

Potential Pullback in the Market’s Direction

Investors dealing with equity markets and REITs have had a particularly difficult month in May due to the first hike in interest rates in almost a decade. Despite consensus earning upgrades, the potential for a downturn and near-term upside to buy-rated equities have seen a PE (price-to-earnings) de-rate. Investors should rather keep an eye on the industrial powerhouse, whnth has successfully raised its earnings growth prediction to this month 23%. In the present scenario, they manage about $80 billion in assets and have already indicated earnings growth beyond expectations for the year.

The surge in nominal yields from roughly 60 to over 100 basis points has been weighing the hardest on listed properties, despite the nominal yields on 10-year bonds, which have seemed to rise from 3.1 percent to 3.6 percent before moderating this month. Higher real bond rates should indeed lead to increased real return requirements, and asset prices should reflect and adjust to the criteria.

As inflation takes a toll, certain established norms are being challenged. The sell-off, nonetheless, provides a number of intriguing opportunities. In the ‘through the cycle’ strategy, there has been factoring in the higher real bond rates for some time now. A strong value tilt and more conservative positioning have helped investors maintain a resilient portfolio over time. As building expenses rise, it may be wiser to hold onto existing properties rather than investing in new ones, for which you can always opt to seek help from the commercial real estate¬†agency Axis Property.

For property investors, long-term leases have become an outgrowing demand. You don’t want a long-term lease with very low fixed increases because you cannot capture that once inflation subsides. There will be more demand for shorter-term leases if rents remain competitive; that way, you can profit from the increase.

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Frances Garret