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ASX Property Sector Set for FY25 Reporting Season: Key Insights from UBS
As the Australian Securities Exchange (ASX) property sector gears up for the FY25 reporting season, UBS analysis highlights a landscape marked by solid long-term fundamentals, yet shaded by several immediate challenges that could influence performance.
Positive Long-Term Growth with Challenges Ahead
UBS’s outlook remains optimistic regarding the macroeconomic environment for Australian Real Estate Investment Trusts (A-REITs), noting strong rental growth, declining interest rates, and limited supply. However, they caution that elevated expectations, individual company hurdles, and valuation concerns might affect forthcoming results.
Growth Projections Driven by Rate Cuts
The investment bank predicts a robust growth trajectory for the A-REIT 200 index (excluding Goodman Group and Charter Hall Group), forecasting growth rates of 5.1% in FY26 and 4.9% in FY27. This optimism is primarily fueled by anticipated rate cuts and the unwinding of interest rate hedges. UBS utilises a conservative terminal interest rate of 3.6% for their projections, compared to the market’s more aggressive 3.3% forecast for December 2025. Each 50 basis point shift in rates is estimated to impact earnings by approximately 2% for FY26 and 3-4% in subsequent years.
Mid-Cap REITs: A More Attractive Investment Option
Amidst a positive macro backdrop, UBS suggests that investors might discover better opportunities with mid-cap passive REITs, rather than sticking solely to large-cap giants. UBS has identified eight mid-cap stocks—ARF, CIP, CLW, CNI, COF, HDN, NSR, and RFF—that promise over 4% earnings growth from FY26 to FY29 and present reasonable valuations. This recommendation stems from concerns surrounding high expectations associated with prominent performers like Goodman Group, Stockland, Mirvac, and Vicinity Centres, alongside specific issues faced by other firms.
A Nuanced Valuation Landscape
Although the A-REIT 200 is quoted at a 5% premium over net tangible assets (NTA), UBS’s analysis reveals a more intricate valuation landscape. Presently, only five firms in UBS’s coverage exceed their asset backing, while ten companies—comprising 46% of sector market capitalisation—trade below NTA, even as valuations likely have hit a low. The sector currently displays a 6.2% discount against UBS’s price targets, with the twelve-month forward price-to-earnings multiple sitting at 15.1 times, merely above the long-term average of 14.8 times. This situation marks a decrease in the gap between implied capitalisation rates and 10-year bond yields, contracting to 179 basis points from the typical 229 basis points typically associated with elevated interest rates.
Key Performance Themes in FY25
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Company-Specific Challenges: Dexus is grappling with ongoing APAC litigation, while HMC faces downward momentum and Lendlease deals with risk from wholesale redemption windows.
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Operational Focus: Investors will be keeping a close watch on leasing trends, occupancy levels, and development progress, as enterprises navigate the transition toward a lower interest rate environment.
- Capital Management: Key themes will include balance sheet strength, refinancing of debt, and strategies for divestment as companies manage leverage while seeking growth.
UBS’s Expectations and Guidance
| Company | UBS FFO/EPS | Guidance | UBS DPS | Comments on FY25 Guidance |
|---|---|---|---|---|
| Arena REIT | 18.6 | DPS only | 18.2 | DPS of 18.3cps |
| BWP Trust | 19.1 | DPS only | 18.7 | DPS of 18.7cps |
| Charter Hall Group | 81.9 | 81.0 | 48.2 | Post-tax OEPS 81.0cps, DPS growth 6.0% |
| Centuria Industrial | 17.6 | 17.5 | 16.3 | FFO of 17.5cps, DPS of 16.3cps |
| Charter Hall Wholesale | 25.0 | 25.0 | 25.0 | EPS and DPS of 25.0cps |
| Centuria Capital | 12.1 | 12.0 | 10.6 | OEPS of 12.0cps, DPS of 10.4cps |
| Centuria Office | 11.9 | 11.8 | 10.1 | FFO of 11.8cps, DPS of 10.1cps |
| Charter Hall Retail | 25.6 | 25.4 | 24.7 | OEPS of 25.4cps, DPS consistent with FY24 |
| Dexus | 45.3 | 44.5-45.5 | 37.8 | AFFO between 44.5-45.5cps, DPS of 37cps |
| Goodman Group | 117.2 | 117.2 | 30.0 | OEPS growth of 9%, DPS of 30.0cps |
| HomeCo Daily Needs | 8.8 | 8.8 | 8.5 | FFO of 8.8cps, DPS of 8.5cps |
| HMC Capital | 54.7 | 66.0 | 12.0 | EPS of 66cps, DPS of 12cps |
| Ingenia Communities | 29.4 | 29.0-30.0 | 11.7 | EPS 29.0-30.0cps, EBIT growth 20-23% |
| Mirvac | 12.1 | 12.0-12.3 | 9.1 | OEPS 12.0-12.3cps, DPS of 9.0cps |
| National Storage | 11.7 | 11.8 | 11.3 | UEPS minimum 11.8cps, distribution 90-100% |
| Stockland | 33.3 | 33.0-34.0 | 25.0 | FFO 33.0-34.0cps, DPS 75% of post-tax FFO |
| Vicinity Centres | 14.8 | 14.5-14.8 | 12.0 | FFO at top end 14.5-14.8cps |
Conclusion
In summary, while the Australian property sector showcases promising growth potential driven by easing interest rates, a cautious approach is warranted due to the high expectations and specific company challenges that could influence performance during the upcoming reporting season. As investors evaluate their options, the potential of mid-cap REITs and an astute focus on operational metrics will be paramount.
