ASX property shares offer some of the most interesting opportunities right now. Many companies in the sector are still far below their peaks of 2021.
Higher interest rates probably explain a lot of the pain for property-related companies because they hurt both operating profits and real estate values.
Property businesses usually have a higher level of debt (gearing) compared to most other sectors, and debt is now significantly more expensive than it was three years ago, so this has increased expenditure.
The higher interest rates are a headwind on commercial property prices. Investors are currently able to get a high return from 'safe' investments like term deposits, making ASX property shares – which have riskier payouts – less appealing.
However, there's a fair chance that the Reserve Bank of Australia (RBA) will cut rates in 2025, and that could significantly boost the ASX property share industry.
Here are two stocks in the property sector that I think could be appealing options to build a position in.
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Centuria Office REIT (ASX: COF)
This real estate investment trust (REIT) owns office buildings across Australia. The chart below shows that the Centuria Office REIT share price is down 55% from September 2021, a significant decline.
To start with, I'm excited to hear that office buildings could start to see a recovery in 2025, particularly in Sydney.
In the first quarter of FY25, the Centuria Office REIT signed lease terms for 3,531 sqm across 11 transactions. This takes the occupancy rate to 91.2% with a 4.2-year weighted average lease expiry (WALE). While those stats aren't the best in the sector, I think they indicate the business has locked in more rental income than some investors are giving it credit for.
The REIT expects to generate 11.8 cents of rental profit (funds from operations (FFO)) per security in FY25 and pay a distribution of 10.1 cents per security. At the current valuation, it's trading at less than 10x its forecast rental profit with a distribution yield of 8.7%.
I think the business can benefit from a number of positive trends, including return-to-office mandates and limited office supply because of elevated development costs.
Centuria Capital Group (ASX: CNI)
This is the funds management business that operates Centuria Office REIT and Centuria Industrial REIT (ASX: CIP).
The REITs mentioned above are two of the biggest assets on the Centuria balance sheet, so the fund manager would benefit from a possible increase in their share prices.
It could also benefit if lower interest rates lead to an increase in the property values that it manages — both in the listed REITs and the various unlisted properties. And higher real estate valuations could lead to a boost in management fees for the business.
The ASX property share could also successfully attract a higher level of new client inflows if those clients are more optimistic about the outlook. Higher FUM for Centuria should then lead to higher funds management profits.
Overall, I think there are many positive factors at play for Centuria if there are rate cuts this year.
Even without a rate cut, it appears good value after a 50% drop from September 2021, as the chart below shows.
