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Why the ASX Real Estate sector is set to keep climbing in 2H19

For all the doom and gloom surrounding Australian real estate in the past 18 months, the S&P/ASX 200 Real Estate (INDEXASX: XRE) index has still managed to post a handy 12% return in the last year.

What has fuelled the Real Estate sector’s climb?

Australian real estate and the real estate investment trusts (REITS) have been boosted by robust demand in the residential segment, despite a downturn for retailers in Australia.

The likes of Mirvac Group (ASX: MGR), an REIT with one of the highest residential exposures of the sector, has put aside fears of an apartment glut and domestic housing market collapse to post strong capital gains over the past 12 months.

While others in the retail sector have struggled, including Shopping Centres Australasia Property Group Ltd (ASX: SCP) and Scentre Group (ASX: SCG), I think the performance in other real estate segments has managed to keep the REITs humming along in the first half of the year.

However, real estate does make up a small proportion of the S&P/ASX 200 (INDEXASX: XJO) index when comparing even the largest REITs to the likes of BHP Group Ltd (ASX: BHP) or Commonwealth Bank of Australia (ASX: CBA), meaning the performance hasn’t necessarily been shown in the broader market index.

If conditions remain intact for the second half of the year, I don’t see any reason for real estate’s bullish growth run to end, which is particularly impressive given the paying out of those more than handy distributions to REIT investors.

Where to next for the Real Estate sector?

The recent decision by the Reserve Bank of Australia (RBA) to lower rates by 50 basis points (bps) over two consecutive months bodes well for the 2H19 performance of the Australian REITs.

With lower rates, basic economics would suggest we should see cashed up buyers looking to borrow cheap money and purchase their dream homes, sending property prices higher and boosting valuations across the board.

While the outlook isn’t quite so rosy for the retail sector, particularly if we continue to see weakening labour data in the next 12 months, I’d expect to see the office, industrial, and residential sectors fuel REIT security prices higher still.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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