A new playing field

We believe the property market is entering a new playing field with higher inflation, higher interest rates, and lower growth. The recent CPI data showed a 6.8% y-o-y, stubbornly higher than the market anticipated. This combined with the 5.75% increase in award wages, at a time when productivity growth is low, has led many market participants to now expect cash rates to remain higher for longer.

So how have REITs performed in this environment?

Quarterly company updates have underscored the operational resilience of the sector, with the following being reported:

• The majority of A-REITs maintained their earnings guidance. Goodman Group (ASX: GMG) upgraded earnings and Vicinity Group (ASX: VCX) lifted its earnings guidance to the top end of the range, whilst Mirvac Group (ASX: MGR) lowered guidance by 5%.
• Retail sales growth remained healthy at 15% above 2019 despite rising cost of living pressures.
• Office occupancy is holding up better than expected with average occupancy at 93%, whilst REITs with higher quality assets reported a modest decline in incentives. This further reinforces the flight to quality as tenants reassess their office requirements post COVID.
• Industrial markets continue to benefit from low vacancies (<1%) resulting in rental growth of +22%.
• Residential REITs reported a slowdown in settlements from the peaks of 2022, but prices are holding up with medium and long term demand supported by strong population growth and a lack of supply.