This beaten-down ASX sector could soon be turning the corner

ASX property shares have started recovering from their COVID-19 blues but office landlords are still struggling cover lost ground.

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ASX property shares have started recovering from their COVID-19 blues but office landlords are still struggling cover lost ground.

But a turnaround may not be far off. The analysts at Macquarie Group Ltd (ASX: MQG) noting some positives from the latest JLL industry data covering the March quarter.

ASX office shares falling behind

Any turn in sentiment would be good news for the DEXUS Property Group (ASX: DXS) share price. It has only inched up 4.6% over the past year when the S&P/ASX 200 Index (Index:^AXJO) surged 30%.

Fellow office-exposed property groups aren't faring that much better. The Mirvac Group (ASX: MGR) share price gained around a modest 7% and the GPT Group (ASX: GPT) share price added less than 17%.

Glimmer of hope for ASX office property shares

Offices have been left largely empty for most of the past year due to the pandemic. But there are reasons to think that the worst is behind the sector.

"In 1Q21, there was 7k sqm of negative net absorption in Sydney and 56k in Melbourne, which is an improvement on prior quarters," said Macquarie.

"While we expect the leasing environment to remain soft near[1]term, we anticipate continued moderation in negative demand with leading indicators pointing to a recovery."

Net absorption measures the net change in commercial space in the market for a specific time period. It's calculated by deducting office space vacated from the total tenanted space.

Bad but looking less bad

Further, the rate of the drop in effective rents is also easing. The broker noted that gross face rents have fallen by less than 1% quarter-on-quarter in most major markets. Gross face rents exclude incentives given to prospective tenants.

"Again, modestly rising incentives drove effective rent declines in Sydney and Melbourne," added Macquarie.

"Sydney prime net effective rents declined 2.1% q-q, while Melbourne's were -0.6%."

ASX property shares to buy now

The capitalisation rate (cap rate) is also supportive of the sector. This rate has not changed in the March quarter from the one before.

"While we are comfortable with our expected fall in effective rents (20-30%) our prior assumptions for a decline in assets values of 5-10% now appears conservative given transactional evidence to date," said Macquarie.

"We now expect asset valuations to fall 2.5% to 7.5%.

"Given the potential for vacancy and incentives to rise, we are cautious on becoming more positive at this point in the cycle."

Nonetheless, the broker is urging investors to buy the Dexus share price, the Mirvac share price and the Charter Hall Group (ASX: CHC) share price.

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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