Australia’s listed real estate trusts are likely to underperform equities again this year as rising bond yields cause volatility in both sectors, analysts say.
Ructions in global bond and equity markets are causing investors to reconsider their portfolios and will be front of mind as reporting season for listed property kicks off this week.
Rising bond yields will reduce the relative value of commercial real estate, but the extent of the reduction depends on the size and length of the bond sell-off, according to Cushman & Wakefield.
National research director John Sears said three scenarios were likely to play out:
- A limited increase in bond yields between 50 to 100 basis points would keep Australian real estate “relatively attractive” to investors as there was potential for yields in the sector to compress more.
- A stronger, more sustained increase in bond yields between 100 to 200 basis points would see investors focus on markets like Sydney’s office sector which had strong growth prospects. “Markets where growth is soft may find pricing at current levels harder to justify,” Mr Sears said.
- And a severe bond sell-off of 200 basis points or more was likely to impact on equity markets, but “Australian commercial real estate may benefit from its relative stability”.
Australian stocks wiped out about four months of gains over a two-day period following a 3.4 per cent – or $59.8 billion – plunge on Tuesday that took the index back to levels last seen in mid-October.
“If stock markets fall 10 to 20 per cent and stabilise and bond yields do not move significantly higher, scenarios 1 and 2 are more likely,” Mr Sears said.
A-REITs underperformed equities by 6.1 per cent last year, dragged down by weak retail sentiment and the prospect of rising bond yields, CLSA analysts Sholto Maconochie and Stephen Lam said.
“Whilst A-REITs remain in fine shape with strong balance sheets, good growth (about 4 per cent) and attractive yields, we believe the expectation of further rises in bond yields will see them underperform in 2018,” they said.
Positive office fundamentals were likely to flow through to earnings this year and favour stocks with office exposure, they said.
Dexus, Charter Hall, Mirvac and Stockland might surprise investors with an earnings upgrade.
Cromwell Property Group was likely to downgrade earnings due to its recent 10 per cent securities placement.
"We expect this reporting season to be relatively benign with not too many surprises" they said.