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REITs prepare for reporting season

Welcome to our first weekly update for 2019.

The S&P/ASX200 property sector closed the year out with a -2.11% return for the 12 months to December 2018, which was ahead of the S&P/ASX200 return of -6.90%.

The listed securities are all busy preparing to report their latest results during February. We note that the valuation cycle is beginning to show some signs of slowing evidenced by the announcement that Australian Office Fund (ASX: AOF) is set to hold its portfolio capitalisation rate flat at 6.5%. Back in December, SCA Property Group (ASX: SCP) indicated capitalisation rates would increase only marginally by 4bps to 6.37% on its existing portfolio.

Dexus (ASX: DXS) announced its capitalisation rates would reduce by 16bps to 5.36% in the six months to December 2018. Previously DXS expected 10-15bps tightening for the full year FY19, so the 16bps in 1H19 suggests little or no further cap rate movements are expected in the second half. Whilst the majority of the market considers the valuation cycle to be close to a peak, it will be interesting to hear what funds managers are expecting during the upcoming reporting season.