Why ASX-listed property shares could be on the chopping block

A top broker has cut its price targets on Australian REITs but also sees some opportunities in the sector.

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Key points

  • Top broker UBS has reduced its price targets on A-REITs by an average of 15% 
  • The broker says it's time to buy Centuria Industrial REIT and Charter Hall Group
  • UBS analysts say rising interest rates will reduce profits for A-REITs between FY23 and FY26

Top broker UBS has reduced its price targets on Australian real estate investment trusts (REITs) by an average of 15% but also says it’s time to buy a couple of the biggest names.

The ASX Australian REIT (A-REIT) sector includes Charter Hall Group (ASX: CHC), Charter Hall Retail REIT (ASX: CQR), Charter Hall Long WALE REIT (ASX: CLW), Centuria Industrial REIT (ASX: CIP), Goodman Group (ASX: GMG), Stockland Corporation Ltd (ASX: SGP), and BWP Trust (ASX: BWP).

Which ASX property shares does UBS like?

According to reporting in The Australian, UBS has raised its rating on Centuria Industrial to a buy. This follows a 30.5% fall in the Centuria Industrial share price year to date.

The broker also gives ASX investors the green light on Charter Hall Group. UBS reckons it’s time to buy Charter Hall shares, which have dropped in price by 47.5% in 2022.

The UBS team has also raised its rating to neutral on BWP Trust shares. The A-REIT stock has lost 7.8% in value in 2022.

And finally, UBS has expressed some pessimism about Shopping Centres Australasia Property Group Ltd (ASX: SCP) shares. The team has lowered its rating to neutral. The Shopping Centres Australasia share price is down 10% this year so far.

A-REITs underperform in 2022

The news report notes “material sector underperformance” for ASX property shares this year.

The S&P/ASX 200 A-REIT Index (ASX: XPJ) has lost 25% in 2022, underperforming the broader benchmark S&P/ASX 200 Index (ASX: XJO) which has fallen 14%. But it’s better than the ASX tech sector, with the S&P/ASX All Technology Index (ASX: XTX) down 40%.

UBS analyst Grant McCasker said: “As extraordinary policy settings normalise and inflation emerges, markets are increasingly pricing in negative outcomes [including] a potential recession or stagflation.”

Rising interest rates to hurt A-REIT profits

McCasker thinks A-REITs will lose profits over the next three years due to rising interest rates.

The article said McCasker has reduced his forecasts for sector earnings over FY23 to FY26 by 5%.

The loss in earnings will be “marginally offset by inflation-linked leases; FY23 asset devaluations of
about 8 per cent for real estate fund managers; and a more severe residential downturn”, the article said.

The latest monthly CoreLogic report revealed national home values fell for the first time since September 2020 last month. The national fall — which was only 0.1% — was led by Sydney and Melbourne.

These two markets began to cool earlier in the year. Home values are down 0.9% and 0.6% respectively.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Shopping Centres Australasia Property Group. 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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