ASX real estate: Broker views and a fund manager's top sector picks

As anyone with a mortgage knows by now, property ownership means you're vulnerable to interest rate moves. Leaving aside the obvious effects on housing, listed property has also taken a big hit.

The ASX 200 Real Estate Index dipped by 25% between the start of May – the RBA’s recent rate rising cycle kicked off on 3 May 2022 – and 13 October. The index has recovered some ground since then, but is still down 13% year on year, as of the market close on Wednesday 18 January.

ASX 200 Real Estate Index vs ASX 200 over 5 years

Winding back the clock, REITs were also hit particularly hard during the 2008-2009 global financial crisis, when the broader sector in the US tanked by more than 37%. 

It was worse still for some parts of the space in the US market, with those focusing on hotels, malls, and industrial properties declining by around 60%.

Fast forward 14 years and we’ve seen double-digit declines in listed property driven by the post-pandemic, inflation-linked selloff. In this feature, I look at how a handful of brokers rate the largest ASX-listed property players and get a perspective on what lies ahead from Andrew Parsons, CIO of REIT-specialist asset managers Resolution Capital.

Goodman Group (ASX: GMG)

A developer and landlord of commercial and industrial properties in Australia and other markets including North America and Europe, Goodman Group has a long history in the space. The biggest ASX-listed property firm, the $36 billion market cap company saw its share price fall just under 30% last year.

CLSA shifted its ratings on several A-REITs on 23 November – and six of the eight moves were downgrades. Goodman Group was dropped to OUTPERFORM from Buy, analyst James Druce cutting his price target to $20.41 from $24.51.

Citi left its rating for GMG unchanged at BUY on 21 July but cut its price target to $22 from $29.50.

Goldman Sachs dropped its coverage of Goodman Group – and in fact, the entire ASX-listed property sector – last week (on 10 January). A BUY rating was its latest view on the company, which was added to its coverage list on 12 May. The former Goldman Sachs analyst Jeffrey Pehl had set a price target of $25 for GMG.

Goodman shares were trading at $19.17 at the close on Thursday 19 January.

Scentre Group (ASX: SCG)

The shopping centre operator, with Westfield being its flagship mall brand in Australia and New Zealand. It has a market cap of $15.7 billion.

Morgan Stanley upgraded the company to OVERWEIGHT from Equal Weight on 19 January, with analyst Simon Chan also lifting SCG’s price target to $3.55 from $3.

Macquarie downgraded the company to UNDERPERFORM from Neutral on 11 November and cut its price target to $2.54 from $2.79.

Credit Suisse also places a NEUTRAL rating on the company, having pulled it back from Outperform on 24 August. Analyst Peter Zuk has a price target of $3.08 for the mall operator, which was reduced from $3.20.

Scentre Group shares were trading at $3.02 at the close on Thursday, up almost 6% since the start of the year but still 14% down versus the same time in 2022.

Vicinity Centres (ASX: VCX)

The third-largest REIT on the ASX, with a market cap of $9.35 billion, Vicinity Centres also specialises in owning and managing shopping centres. Diversified across various retail categories, most of its capital is in larger shopping malls, with Australia’s largest mall in Chadstone, Melbourne a flagship asset.

The company made headlines – for the wrong reasons – last November, when it emerged former CEO Grant Kelley had pulled forward his retirement plans in the wake of a sexual harassment complaint, as reported by the Australian Financial Review. 

Morgan Stanley lifted its rating for Vicinity Centres to EQUAL WEIGHT from Underweight on January 19th. Analyst Simon Chan also increased his price target by almost 19%, to $2.26 from $1.90.

J.P. Morgan’s latest rating change on VCX was on 17 November, when it downgraded the AREIT to Underweight from Neutral. Analyst Richard Jones reduced his price target slightly to $2 from $2.10.

And before Goldman Sachs’ dropped coverage of the sector – as mentioned earlier – on 2 September, the broker downgraded Vicinity Centres to NEUTRAL from Buy. Former analyst Jeffrey Pehl also edged the price target down to $2.09 from $2.10.

Vicinity Centre’s stock price yesterday closed at $2.06, up 14% since the start of 4Q 2022 and more than 20% higher year-on-year.

Stockland (ASX: SGP)

With a market cap of $9.24 billion, Stockland is a conglomerate that generates most of its earnings from a portfolio of retail, industrial, and office properties. Residential development and retirement living comprise around 20% and 5% of group earnings.

Citi has held a NEUTRAL rating on Stockland since 22 August, when it downgraded the company from Buy. At the same time, analyst Suraj Nebhani reduced his price target to $3.96 from $4.25.

Jarden resumed coverage of Stockland with a NEUTRAL rating on 21 August, with analyst Andrew MacFarlane setting a price target of $4.

Goldman Sachs added the company to its coverage list on 3 August with a BUY rating and a $4.44 price target, before the entire sector was dropped in January 2023.

Stockland shares closed at $3.88 on Thursday, down 7.4% over 12 months but almost 6.5% ahead of the local Real Estate sector average.

Mirvac Group (ASX: MGR)

A developer and manager of property assets across its investment, commercial and mixed-use, and residential divisions, Mirvac has a market cap of $8.96 billion. A selldown of its assets in office and retail was announced by CEO Susan Lloyd-Hurwitz in August 2022, alongside a refocus on investments in industrial property and residential “build-to-rent”.

Lloyd-Hurwitz will step down as CEO in March to head up the Federal Government’s new council on housing supply and affordability. Campbell Hanan, who heads Mirvac’s Integrated Investment division, was announced as the new CEO last October.

Macquarie downgraded Mirvac to NEUTRAL from Outperform on Thursday but increased its price target to $2.30 from $2.21.

J.P. Morgan upgraded Mirvac to OVERWEIGHT from Neutral on 26 May, but analyst Richard Jones reduced his price target to $2.50 from $2.60.

A view from the buy side

“Like chalk and cheese”

They’re the words Resolution Capital’s Andrew Parsons uses to describe the contrast between A-REITs now and during the GFC period.

“Their leverage is instrumentally lower, and they don’t have financial engineering,” says Parsons.

“In 2007 and 2008, there was a lot of currency hedging. This meant that, when the Australian dollar collapsed, we saw substantial currency losses which exacerbated the high debt levels.”

Again, casting back to the GFC period, Parsons also cites a prevalence of “strategically complicated vehicles, and with offshore exposures that management teams often didn’t fully understand.”

This is no longer the case, with lower debt levels now, explains Parsons – though as detailed below, it remains problematic. But he emphasises that offshore real estate exposure in A-REITs now is far lower, at a sub-20% level versus around 45% in the GFC period.

“You now also have a broader opportunity set within Australian listed property. There’s more diversity, with the likes of childcare, self-storage, petrol stations, a bit of healthcare, and development earnings also going through the sector,” Parsons says.

The elephant in the room

Of course, much of the outlook for the sector depends on the extent of further interest rate increases in Australia.

Largely because of this, debt remains the greatest challenge facing A-REITs today. But Parsons emphasises his earlier point about overall debt levels being far lower now than during 2007-2008. The proportion of floating-rate debt is also higher than that of fixed-rate debt.

“You will see a redistribution of earnings in 2023 but they will probably be flat, on average, because A-REITS have earnings headwinds. Though this is a short-term earnings issue, not a structural threat to their capital values,” says Parsons.

Winners and losers in Aussie real estate

Parsons is most bearish on anything to do with the office sub-sector.

“Today, office REITs are the worst performers. There is elevated supply and you have the work-from-home dynamic, which is a bit of an existential threat,” he says.

“WFH is having an extraordinary impact on the white-collar workplace. And particularly with low unemployment, workers are being able to dictate work conditions.”

Unsurprisingly, office property is an underweight position for Resolution Capital’s property funds currently.

On the other side of the ledger within Australian listed property, Parsons is positive on these two areas:

• Residential, especially affordable housing. “Anyone that’s offering that is looking pretty good,” he says.
• Retail. “It’s been seen as a victim of eCommerce, but out of COVID, it’s become apparent that bricks-and-mortar retail is still viable and profitable to sell goods and services. We think retail property is under-appreciated,” says Parsons.

The first of these points aligns with the direction being taken by property developer Mirvac, which is one of a handful of companies pushing the asset class along in Australia. Locally, build-to-rent is still gathering momentum but is a major property investment class the US and Europe.

And on retail, Parsons says the Australian market is starting to realise the high expenses involved in eCommerce.

"It’s got to be met with some financial reality: the most profitable sales still take place in bricks and mortar,” he says.

“One of 2 things has to happen. Either these businesses accept [that home delivery sales] are profitless, or they need to start increasing the charges for delivery.”

What's your view on ASX-listed property?

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