REITs to remain stable amid rebounding earnings growth

“A renewed focus on supply chains because of coronavirus disruptions and limited space availability will support demand for industrial assets, benefiting A-REITs active in this space.”

“In the office space, performance remains for now supported by low vacancy rates and low near-term lease expiries, but there is a clear longer-term risk in the form of a potential structural shift to remote work that could affect demand, Moody’s vice president and senior analyst Saranga Ranasinghe added.

Meanwhile, the performance of the retail segment will continue to diverge between discretionary and non-discretionary spending, with discretionary spending to improve over the next 12-18 months but from a low base.

A recovery in Australia’s economic growth in 2021 will support overall demand for A-REIT assets, with the GDP expected to grow by 4.3 per cent in 2021 – a positive market indication compared with the 5.3 per cent contraction in 2020.

The outlook for single dwelling residential is improving following government stimulus and measures to facilitate access to bank lending. Single family dwellings, excluding the major metropolitan areas in Sydney and Melbourne, are best placed to benefit from ongoing stimulus initiatives.

On the other hand, residential construction, as reflected by housing starts, continues to be soft, but residential property demand and prices are showing signs of stabilisation and a potential rebound.

According to the report: “A-REITs benefit from annual rent increases... Typical rental structures include fixed annual increases of around 3 to 4 per cent for office leases, fixed increases of 4 to 5 per cent for specialty retail leases and fixed increases of around 3 per cent for industrial leases. Typical lease terms are five years for retail and around seven years for office and industrial.”

“Still, vacancy levels have risen from low levels for office and retail REITs. We expect vacancy levels will remain weaker than pre-pandemic levels over the next 12-18 months.”

Overall, Moody’s expects the rated A-REITs’ aggregate net operating income will grow around 2 to 3 per cent over the same period.