Commercial Property Resilient with talk of Bumper Growth

Commercial Property Resilient with talk of Bumper Growth

The S&P/ASX 200 Index (ASX: XJO) is up 11% over the past 6 months. Another very strong period as the companies continues to recover from the initial hits of the pandemic.

Meanwhile, listed landlords, or REITs as they are known, have outperformed the S&P/ASX200 by 8.5 percentage points over the past six months, driven by consensus earnings upgrades and strong growth in their net tangible assets.

The first of the ASX 200 shares rated as a ‘buy’ by Jarden analysts Lou Pirenc and Andy MacFarlane is Charter Hall Group (ASX: CHC). Charter Hall is an integrated property group that manages both ASX-listed and unlisted property funds.

As the Australian Financial Review reports, Jarden believes Charter Hall “could deliver a 15.5 per cent total return to its investors” over the coming year.

According to the analysts: “We continue to be supportive of the dedicated fund managers, as ongoing assets under management growth, strong demand from co-investors, fund performance and investment capacity should drive superior growth.

The Charter Hall share price is up 51% over the past 6 months. At the current share price of $18.11, it pays an annual dividend yield of 2.1%, 39% franked.

Industrial funds giant Goodman has soared so much its valuation is looking “stretched”, the analysts wrote. There is more of that outperformance to come, say Jarden’s Lou Pirenc and Andy MacFarlane, who forecast total returns of 11.2 per cent and a 5.1 per cent distribution yield for the more passive-style REITs.

“We appreciate the structural pressures from online and cost inflation but believe the market is underestimating the growth and rerating potential from gross [rent] collection levels to return to pre-COVID levels,” the analysts wrote in their wrap-up of earnings season.

Improving rent collection, once reopening is underway, could lift pre-tax earnings by 17 per cent to 24 per cent in the 2022 calendar year for the more discretionary retail REITs, they wrote.

The second of the ASX 200 shares tipped to outperform is the Scentre Group (ASX: SCG), the owner and operator of Westfield shopping centres across Australia and New Zealand.

Scentre, the country’s biggest listed retail landlord based on a portfolio of 42 Westfield shopping centres and more than $50 billion in assets under management,  has been upgraded to a “buy” by Jarden, which tips a 24.9 per cent total return over the next 12 months for the stock, including a 5.1 per cent dividend yield.

The Scentre share price is flat over the past 6 months, currently trading at $2.87 per share. But if Jarden has it right, both these ASX 200 shares could see their share prices significantly higher this time next year.

Macquarie analysts also identified the funds’ management thematic as one avenue for growth that emerged over the earnings season as listed property stocks seek to lift earnings in a low-growth environment.

That augurs well for Charter Hall and Goodman, according to the Macquarie analysts, although they also consider the “consensus earnings upgrade story may be abating” for Goodman. Macquarie has upgraded Dexus to “outperform” given its resilient earnings and valuations, its ambitious capital recycling and the “upside risk” in its efforts to step up funds management.

“The current ‘slowdown’ phase of the economic cycle is positive for the REITs, albeit an increase in yields resulting from FOMC [Federal Open Market Committee] tapering remains a risk,” the Macquarie analysts wrote.

The rebound in property stocks contrasts starkly with the volatility of last year, when the pandemic first hit, causing listed landlords to pull their earnings guidance and, in the cases of Scentre and Vicinity Centres, to write down portfolio values drastically.

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