Property stocks have caught our attention. On Friday, bond yields traded materially higher on a spike up in Oil prices prompting Aussie 3-year yields to increase by ~10bps. We flagged this at the time. In this scenario, the expectations would be for interest rate sensitive sectors like property to get sold off aggressively, yet that didn’t happen, implying the selling towards the sector has been exhausted. This week, those macro headwinds have eased and property stocks (and retailers for that matter) have rallied from near 52 week lows. We think both of these sectors offer very interesting value/yield opportunities at current levels. Today, we’ll focus on property.
The table below looks at simple metrics including their prevailing share price relative to 52-week lows & projected yields.
Furthest from the lows: Charter Hall Group (CHC) has recovered the most from its trough, up +28.1% off its 52-week low, followed by Scentre Group (SCG) +20.6% and Goodman Group (GMG) +20.4%. All three are quality, well-managed names, but the size of the bounce means the easy money looks to have been made, and only Scentre Group has a palatable yield.
Closest to the lows: Centuria Industrial REIT (CIP) +8.2% and Mirvac (MGR) +9.1% sit nearest their 52-week lows, suggesting the office/industrial end of the sector has lagged the broader recovery. We hold MGR in the Income Portfolio (& Growth) and see this as the more interesting side of the ledger right now. The stock hasn’t participated in the bounce to the same degree as the retail-heavy names, despite a residential settlement cycle that for now at least has been solid. If the rally broadens out, as we suspect it will, laggards like MGR and CIP are where we’d expect the next leg of catch-up to come from.
Highest projected yields: HomeCo Daily Needs REIT (HDN) 6.8%, Charter Hall Long WALE REIT (CLW) 6.7% and Charter Hall Retail REIT (CQR) 6.4% lead the income screen. These are the names for investors wanting to be paid to wait. Non-discretionary, high quality tenants with long leases and limited near-term development risk. We currently own CLW in the Income Portfolio.
Lowest yields: Goodman Group (GMG) 1.0% and Ingenia Communities (INA) 2.1% sit at the other end, reflecting growth-oriented profiles with low payout ratios. Capital is being retained and reinvested rather than distributed. That’s the trade-off: less yield today for (hopefully) more growth tomorrow, and the market has historically been prepared to pay up for it. These are not stocks for the Income Portfolio.
The fact that a 10bp spike in yields didn’t trigger fresh selling in property is the tell here, suggesting the sector had already priced in a good deal of rate anxiety, and sellers are running out of ammunition. We like MGR and CLW best here and now, and WPR looks interesting at the smaller end. Todays inflation print will be important for the sector with a more benign read likely to be a strong positive catalyst.
