Valuation expectations for June 2021
A number of listed REITs have announced valuation movements for the June 2021 period, with indications that overall valuations will remain fairly strong. So far, eight REITs have indicated between -3.1% and +25.7% valuation gains on various components of their portfolios. It is worth noting that we have seen a preference for Boards to undertake more independent valuations for June 2021, in order to provide a more accurate assessment of portfolio values following the uncertainties brought upon by COVID-19.
The demand for Industrial properties continues to accelerate with the national vacancy rate sitting at a very low 2.2% (Sydney 1.4%, Melbourne 1.55%, Brisbane 2.9%, Perth 4.3% and Adelaide 3.2%). Driven by an increase in ecommerce and logistics, the demand has flowed through to sales transactions with prices paid for well-located industrial assets reaching record levels. Centuria Industrial REIT (ASX: CIP) undertook independent valuations on 56 of its 61 industrial properties in March 2021, followed by all 61 being independently valued at June 2021. The result was a combined +19.9% gain in valuation over the six-month period. Strong gains were also delivered from the industrial portfolios of Charter Hall Long WALE REIT (+9.5%) and Growthpoint Properties (+10.9%) over the same period.
Non-discretionary retail continues to show resilience, with valuation gains from SCA Property (+9.5%), the retail portfolio of Charter Hall Long WALE EIT (+6.7%), Charter Hall Retail REIT (+2.1% on convenience shopping centres) and Vicinity Centres’ neighbourhood centres (+2.2%) for the six-month period. However, landlords with Discretionary Retail exposure have been impacted with Vicinity Centres indicating valuation impacts on Super Regional Centre Chadstone (-2.1%), CBD Centres (-3.1%), Regional Centres (-1.3%) and Sub Regional Centres (-0.5%). In the Office sector valuation gains were announced by Charter Hall Long WALE REIT (+4.0%) and Growthpoint Properties (+5.4%).
Whilst the announcements provide solid valuation gains, we note that this is only from eight REITs, and we expect a significant number of independent valuations are still to be finalised across other REITs. In particular, we note that discretionary retail and CBD office markets remain under pressure and we expect to see some weaker results in these sectors.
Valuation gains contribute to underlying value and increases in the Net Tangible Asset (NTA) value of property securities. But strong increases in value lead to higher management fees. This leads to higher expenses which reduces the benefits of rental income increases. In order to deliver distribution growth, we expect that many fund managers will look to further acquisitions as a means to fund this growth in earnings. Where valuation gains have materially lowered Loan To Valuation Ratios, the REIT may be able to utilise debt to fund acquisitions, thereby providing accretive earnings growth.
Six out of the eight REITs undertook independent valuations on between 62% - 100% of their portfolios (AQR, CIP, CLW, CQR, GOZ, VCX). The other two REITs (ARF and SCP) applied Director’s valuations to the majority of their portfolios.
With the industrial sector remaining in high demand, both Centuria Industrial REIT (ASX: CIP) and Growthpoint Properties (ASX: GOZ) undertook independently valuation on their entire industrial portfolios. Charter Hall Long WALE REIT (ASX: CLW) undertook independent valuations on 92% of the portfolio.
- APN Convenience Retail REIT (ASX: AQR) – 62 out of 100 properties were independently valued at June 2021. All properties were independently valued with the last 12 months.
- Arena REIT (ASX: ARF) – 47 out of 234 Childcare (Early Learning Centres) were independently valued at June 2021. 4 out of 11 healthcare assets were independently valued at June 2021. Remaining ELC and healthcare assets were subject to Directors’ valuations.
- Centuria Industrial REIT (ASX: CIP) – all 61 properties were independently valued at June 2021. 56 were also independently valued in March 2021.
- Charter Hall Long WALE REIT (ASX: CLW) – 458, or 92% of the portfolio by gross asset value, was independently valued at June 2021.
- Charter Hall Retail REIT (ASX: CQR) – 64% of the portfolio by gross value was independently valued at June 2021.
- Growthpoint Properties (ASX: GOZ) – 45 out of 55 properties (or 77% of the portfolio by value) were independently valued at June 2021. All 31 of the industrial properties were independently valued, and 13 out of the 24 office properties were independently valued at June 2021.
- SCA Property Group (ASX: SCP) – 24 out of 87 properties from the like-for-like portfolio were independently valued at June 2021. The remaining 63 properties were subject to Directors’ valuations.
- Vicinity Centres (ASX: VCX) – 39 out of 60 directly owned retail properties were independently valued at June 2021, the remaining 21 were valued internally.