The S&P/ASX 300 A-REIT Accumulation Index moved sharply higher over the quarter, adding 10.1%. Property stocks significantly outperformed broader Australian equities, despite the S&P/ASX 300 Accumulation Index rising by 2.2%.

There continues to be strong demand for direct exposure to Australian property. Whilst this has been true across certain subsectors for a while, demand during the quarter has been broad-based, with office and retail property transactions taking place at robust prices. This thematic has been particularly supportive of property fund managers, who are facing record demand for access to their investment products. Charter Hall Group (CHC) upgraded their full year earnings guidance twice in the quarter, supported by a combination of transactional activity, performance fees and revaluations. Goodman Group (GMG) also increased its earnings guidance for the financial year at its quarterly update. GMG added 22.9% for the December quarter, whilst CHC gained 21.1%.

Office property owners have struggled to keep pace with other property index constituents in recent periods. It is likely that a lot of this can be attributed to ongoing concerns with regards to future demand for office space, as employees’ abilities and desires to work from home continue to expand. Despite these concerns, direct market transactions have either been supportive of book values or occurred at reasonable premiums. Dexus (DXS) has been a beneficiary of this, selling a number of their office properties at solid prices. DXS rose 5.6% for the quarter. Other office owners did not fare as well, with Centuria Office REIT (COF) losing 5.1% and GDI Property Group (GDI) and Mirvac Group (MGR) both giving up 1.0%.

Large shopping centre owners also struggled to keep up in hot markets. Short term influences on foot traffic were mixed across the period. A broad easing of restrictions associated with the suppression of COVID-19 and increased savings rates should have supported outcomes across the all-important Christmas period. Offsetting this, an increase in confirmed COVID-19 cases towards the end of 2021 is likely to have reduced the desire to visit busy shopping centres for some. In this environment, Scentre Group (SCG) underperformed the broader sector, but still rose 5.7% for the quarter, whilst competitor Vicinity Centres (VCX) lifted by 1.2%. With more challenging restrictions put in place across European jurisdictions, Unibail-Rodamco-Westfield was a substantial underperformer, losing 10.7%.

Industrial property continues to be the hot sector, with transaction activity supporting ever-contracting capitalisation rates and therefore increasing valuations for properties. Unsurprisingly, those with exposure to industrial property were strong performers during the quarter. Garda Property Group (GDF) was supported by its large exposure to industrial development land and gained 17.8%. Irongate Group (IAP) received multiple indicative takeover bids and as such lifted by 18.0%. Centuria Industrial REIT (CIP) received independent valuations for the half year, resulting in a like-for-like increase of 9.6% from prior book values. It closed the quarter 13.5% higher.

Market outlook

The Australian listed property sector has recovered strongly, after an initial, sharp drop following the onset of COVID-19. As restrictions surrounding its suppression ease, investors will be able refocus on a sector with defensive and forecastable earnings. In an ongoing low interest rate environment and with uncertainty in other market sectors, the reliability of property-based cash flows is highly valued by many market participants. Strong balance sheets, with low cost, widely available debt is only serving to support this thematic.

Phoenix does remain cognisant of the structural changes occurring in the retail sector with the growing penetration of online sales and the greater importance of experiential offering inside malls. Recent events will likely accelerate these changes. As Australia moves towards reopening, physical retail sales are likely to pick up and test new highs, as seen during sporadic periods of more limited restrictions. These factors are well understood and the trajectory to a new ‘normal’ is only now beginning to reveal itself. This explains why retail stocks have been the most volatile of all property sub-sectors.

Phoenix has for some time discussed the risk of inflation, given the enormous fiscal stimulus and extreme monetary policy setting that we now live with. In very recent times, commentators and bond markets have begun to acknowledge the presence of such a risk. Historically, real assets such as property and infrastructure have performed well during inflationary periods.