Residential strength and fundamentals underscore AREIT opportunity
Grant Berry
The latest reporting season has reinforced the resilience of the AREIT sector, with improving residential momentum and stable operating fundamentals despite ongoing interest rate uncertainty, according to Grant Berry, AREIT portfolio manager at SG Hiscock.
“Reporting season reinforced the resilience of REITs,” said Berry. “While markets have been cautious, particularly around rates, fundamentals have held up well.”
Berry said residential was the clearest positive theme of the season.
“There was some caution around residential REITs heading into results, but first-half outcomes generally came in slightly above expectations,” he said.
Berry highlighted Mirvac, which exceeded first-half expectations, while improving sales trends were evident at Stockland, Peet, and Cedar Woods Properties.
“Peet was the standout, with EPS up more than 100 per cent on the previous half. That’s clear evidence that enquiries are translating into sales,” Berry said.
Importantly, demand has remained firm despite a recent rate rise and expectations of further modest tightening. Berry noted that real bond yields have remained broadly stable at around 2.4 – 2.5 per cent since early February.
“That stability is important because it means the valuation backdrop has not materially shifted,” he said.
“On short term rates unless we see two to three additional 25 basis point increases, we do not expect a material impact on underlying residential activity.
More broadly, AREIT operating fundamentals were stable to improving, despite the sector being down around 3 per cent over the month.
Occupancy levels remained stable across most subsectors. Retail sales growth averaged around 3 per cent, office leasing conditions were mixed but showed signs of bottoming, with some valuation upticks, while industrial assets continued to deliver solid re-leasing spreads.
“Office is where we continue to see opportunity,” he said. “Cromwell Property Group was a standout performer during the season following significant balance sheet repair and simplification in recent years.
“We initiated our position last year at a deep discount when an exiting securityholder created the opportunity. It performed strongly through reporting season.”
Dexus, the largest listed office REIT with a high-quality portfolio, also announced a buyback, highlighting the disconnect between underlying asset values and listed prices.
“That buyback was well received and underscores the value on offer.”
While Berry sees less relative value in some large-format retail, he noted that Scentre Group delivered solid operational outcomes but slightly disappointed the market with 4 per cent calendar year growth guidance.
In contrast, neighbourhood-focused retail remains attractive. Region Group, which predominantly owns neighbourhood shopping centres, continues to benefit from resilient tenant sales, leasing conditions and a strong balance sheet.
“It’s a well-defined, resilient business with a new CEO. It’s the sort of ‘sleep well at night’ stock we favour.”
Similarly, Waypoint REIT – focused on service station and convenience retail assets – has delivered resilient earnings and benefited from prior buybacks, with approximately 70 per cent of its portfolio in metropolitan locations.
“Despite concerns around EV disruption on service stations, this is fundamentally a land-rich real estate portfolio that has performed well.”
Berry emphasised that diversification remains essential, particularly given index concentration.
“The sector is highly concentrated, with Goodman Group representing roughly 35 per cent of the index. While Goodman remains a high-quality business, it slightly disappointed the market on data centre leasing.
“With real bond yields still elevated, valuation discipline is critical. We would rather position for value than be carried away by growth themes.”
