A debt investor’s perspective on the Australian listed property sector
Over the past few reporting periods we have witnessed a steady decline in earnings growth for property companies across the sector even though the challenges in each specific sector (retail, office, industrial and residential) vary.
In this paper we aim to outline the main reasons why we remain positive on the sector from a debt perspective and despite earnings being impeded by cyclical and structural headwinds we maintain that for credit investors, Australian property trusts remain a sound investment proposition.
There is no doubt that over the past couple of years the property sector has been challenged by macroeconomic factors which have materially damaged performance. For the retail REITs, the high Australian dollar, rising utility prices, the stubbornly high savings rate and general economic uncertainty have deterred shoppers. For office landlords, changes in work patterns and reductions in the white-collar workforce have impacted demand for space combined with concerns regarding excess supply coming through in the next few years. Residential development has been challenged by affordability which has driven potential buyers away.
The REITs have responded to changes in demand in a number of ways, such as re-mixing shopping centres to leverage entertainment and leisure offerings, whilst office towers have become more in tune with modern working patterns, but arguably these changes have not been sufficient to combat the lingering headwinds.
Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person. This document does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. Schroders may record and monitor telephone calls for security, training and compliance purposes.