Are ASX real estate shares building towards a better FY25?

Here's the outlook for the ASX real estate sector.

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The last two years have been a volatile time for ASX real estate shares. The question is, where to from here? The outlook for FY25 is uncertain.

Property is one of the most important sectors in the Australian economy, with how much value there is across the commercial and residential sectors.

There are a lot of different ASX shares related to property, including Goodman Group (ASX: GMG), REA Group Ltd (ASX: REA), Scentre Group (ASX: SCG), Stockland Corporation Ltd (ASX: SGP), Vicinity Centres (ASX: VCX), GPT Group (ASX: GPT), Mirvac Group (ASX: MGR), Dexus (ASX: DXS), Charter Hall Group (ASX: CHC), Brickworks Limited (ASX: BKW) and National Storage REIT (ASX: NSR).

Let's look at what may affect the different areas of the property market.

Interest rates

The cost of debt is a key factor for property because it affects the amount of debt investors can take on and their repayments.

We can't know what the Reserve Bank of Australia is going to do, but it remains focused on bringing down inflation in Australia. In its latest monthly decision, the RBA said the following:

Inflation is easing but has been doing so more slowly than previously expected and it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range. While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.

The Board will rely upon the data and the evolving assessment of risks. In doing so, it will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

It seems likely that interest rates will stay high during FY25, and depending on how strong inflation is, a rate rise could occur in the next few months of 2024. This is a strong headwind for ASX real estate shares in FY25.

Solid residential market?

Property builders and real estate portals rely on buyer demand for their sections of the market.

Some capital cities, such as Perth, Adelaide, and Brisbane, have seen strong price growth, whereas others (particularly Melbourne) are experiencing challenging conditions amid higher property taxes.

Mortgage arrears are rising, though listings have increased in Melbourne and Sydney, which is helping REA Group's business. In its latest quarterly update, REA Group said:

Australia's residential property market remains strong, particularly in the Melbourne and Sydney markets. Supply is benefiting from property prices rising to record levels and increased investor selling in some markets, while demand continues to be supported by strong fundamentals including low unemployment and high levels of immigration.

Australia's population growth may continue to help this segment.

Mixed REIT performance

The commercial property sector has various segments, the main ones being industrial, office, and shopping centres. I think the commercial real estate investment trust (REIT) ASX real estate shares may see varied performance in FY25.

Industrial property is seeing strong demand as companies onshore more of their supply chain in limited capital city locations, as reported by Centuria Industrial REIT (ASX: CIP). Strong rental growth could continue in this sector during FY25.

Office buildings, particularly in Melbourne and Sydney, face uncertainty and lower tenant demand amid the COVID work-from-home shift. Dexus recently revealed a double-digit percentage decrease in the value of the office buildings in its portfolio. Depending on interest rate developments, there could be more office pain in FY25.

The largely resilient Australian economy is ensuring that households are collectively still spending money at shops, which is helping the shopping centre REITs. Scentre said in the three months to 31 March 2024, its tenants achieved $6.5 billion in sales, up 2.4% year over year. Time will tell if retail can continue to perform in FY25.

FY25 could be a very interesting year for ASX real estate shares, but it may not be close to the best-performing sector.

Motley Fool contributor Tristan Harrison has positions in Brickworks. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks, Goodman Group, and REA Group. The Motley Fool Australia has positions in and has recommended Brickworks. The Motley Fool Australia has recommended Goodman Group and REA 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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