Some S&P/ASX 200 Index (ASX: XJO) shares could be appealing investment targets in 2025 because of what may happen.
The two businesses I will discuss are Brickworks Ltd (ASX: BKW) and Centuria Industrial REIT (ASX: CIP). Both of them invest in multiple large industrial warehouse properties in key metropolitan locations around Australia. They have great, well-located assets, but there's more to the investment thesis than just that.
There are two reasons why both ASX 200 shares are on track to be big winners this year. Let's examine those underlying factors.
Potential interest rate cuts
The official RBA cash rate is currently sitting at 4.35%, but rates may be reduced at least once in Australia.
According to reporting by the Australian Financial Review, the Commonwealth Bank of Australia (ASX: CBA) head of Australian economics, Gareth Aird, said his base case is that the RBA could cut interest rates four times this year to 3.35%, though the strong jobs market and government spending could mean interest rates are reduced by less than expected. Aird said:
Indeed, fiscal policy is the key source of domestic uncertainty, particularly given the federal election will be held by May 2025.
Interest rate cuts could have a significant benefit for property businesses with debt on their balance sheets. It could lead to improved net rental profits and an increase in industrial property valuations.
The great investor Warren Buffett once explained why interest rates are so important:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
Interest rate cuts would be useful, one-off boosts for the ASX 200 shares I've mentioned. I'm also excited by the tailwinds that industrial property is exposed to.
Underlying demand for industrial property
There are a number of tailwinds that are increasing demand for industrial property.
Centuria explained that industrial tenant customers have become increasingly focused on proximity to dense population centres, but there is also a lack of available land.
Changing consumer eating habits, such as meal kits, fresh food consumption, and grocery e-commerce, have driven a "significant demand" for cold storage and food logistics. Australia's cold storage space per person is reportedly around 25% lower than that of other advanced economies.
There's also increased demand for data centres and distribution centres due to the growth of AI and e-commerce, respectively.
Each of these demand drivers is helping increase the rental potential of these properties and could help push up the property prices as the interest rate hike headwinds subside.
I've bought both Brickworks shares and Centuria Industrial REIT shares in the last several weeks because I am bullish about these ASX 200 shares.
