Australian inflationary state of play and outlook
Insight | 8 minute read
The S&P/ASX 300 A-REIT Accumulation Index moved higher over the quarter, adding 4.8%. Property stocks outperformed broader Australian equities, despite the S&P/ASX 300 Accumulation Index rising by 1.8%. Property stock performance was driven by positive updates provided during August’s reporting season and merger and acquisition (M&A) activity across the sector.
Large capitalisation retail property owners were outperformers over the quarter, after significantly underperforming over recent periods. With a clearer path towards easing of COVID-19 restrictions, confidence in the future of large shopping centres has been somewhat renewed. This was supported by figures presented by shopping centre owners, which demonstrated that when restrictions eased, sales were above levels at comparable periods in 2019. Owner of Westfield-branded shopping malls Scentre Group (SCG) performed particularly well, lifting 11.7%, whilst competitor Vicinity Centres (VCX) added 8.1%. Owners of smaller neighbourhood centres outperformed to a lesser degree. Shopping Centres Australasia (SCP) rose by 7.1%, whilst Charter Hall Retail REIT (CQR) finished the quarter 5.3% higher.
Whilst a path towards eased restrictions is beginning to present, the near-term future of office property remains somewhat uncertain as central business districts remain challenged. Vacancy in Sydney and Melbourne remains above 2019 levels and incentives have remained stubbornly high. Despite this, cash collection of contracted rent has been solid, and demand has not fallen in a precipitous manner as some expected. In this context, it is unsurprising that office property owners were underperformers in the September 2021 quarter. Dexus (DXS) was up 1.2% for the quarter, whilst Mirvac Group (MGR) added 2.4%. Australian Unity Office Fund (AOF) fell by 9.2% and Cromwell Property Group (CMW) gave up 6.7%.
Despite a strong rebound in sales, record high prices and a solid short-term outlook, residential property developers underperformed in the September 2021 quarter. By some measures, residential property prices are up approximately 20% over the past year and almost 5% over the past quarter. In many cases, supply of new housing cannot keep up with demand. Alternatively, discussions of macroprudential policy to cool home lending and a lack of inbound migration is clouding the medium-term outlook for the sector. Large capitalisation developer Stockland (SGP) fell by 3.9% over the quarter. Smaller developers AV Jennings Limited (AVJ), Finbar Group Limited (FRI) and Peet Limited (PPC) lost 1.1%, 4.1% and 12.1% respectively.
Property fund managers continued to grow assets under management strongly, supported by both inflows and strong revaluations. However, stock price performance for the quarter was mixed. Charter Hall Group (CHC) outperformed, rising by 10.5%, whilst Goodman Group (GMG) lifted a smaller 2.4%.
The Australian listed property sector has recovered strongly after an initial, sharp drop following the onset of COVID-19. As restrictions ease, investors will be able refocus on a sector with defensive and forecastable earnings. In an ongoing low interest rate environment 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 theme.
As Australia reopens, physical retail sales are likely to pick up and test new highs, as seen during sporadic periods where COVID-19 restrictions have been eased. We remain cognisant of the structural changes occurring in the retail sector, however, with the growing penetration of online sales and the greater importance of experiential offering inside malls recent events will likely accelerate these changes. These factors are well understood and explain why retail stocks have been the most volatile of all property sub-sectors.
In very recent times, commentators and bond markets have also begun to acknowledge the risk of inflation given the enormous fiscal stimulus and extreme monetary policy setting that we now live with. Historically, real assets such as property and infrastructure have performed well during periods of inflation.