The Reserve Bank of Australia (RBA) finally did it — the official cash rate was lowered yesterday by 25 basis points (0.25%) to 4.10%. While there's no guarantee of when the next rate cut will be, I think it highlights some potential upside for certain S&P/ASX 300 Index (ASX: XKO) shares.
The RBA noted that inflation has fallen substantially since the peak in 2022. However, it also cautioned that the labour market remains unexpectedly strong, expectations of further US rate cuts have eased, and overall Australian disinflation could stall if rates were eased too much too soon.
Nonetheless, the RBA has shown a willingness to consider reducing interest rates to a more normalised level, assuming the data allows. I think this could significantly benefit some ASX 300 shares such as real estate investment trusts (REITs).
Two ASX 300 shares I'd like to explore here are Centuria Industrial REIT (ASX: CIP) and Charter Hall Long WALE REIT (ASX: CLW).
Centuria Industrial owns a portfolio of industrial properties across major Australian cities, while Charter Hall Long WALE owns a diversified property portfolio (pubs and bottle shops, service stations, telecommunication exchanges and so on, with long leases).
They are two of my favourite ASX REITs right now, and I think they can benefit from rate cuts for several reasons.
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Lower debt costs
REITs like these are trying to make rental profits, so the higher financing costs have been a headwind to profitability. The reduction of the RBA interest rate could lead to lower interest payments and therefore boost their operating bottom line.
If investors pay the same valuation multiple for rental profits as they are now, the rate cut alone could help push up share prices due to the higher net rental earnings.
Higher property values
Higher interest rates have also been a headwind for property valuations. Rates act like gravity on interest-rate-sensitive assets, pulling down on their valuations.
A rate cut, and any future cuts, could help increase the value of the underlying property and, therefore, also the share price.
If interest rates start heading back to anywhere near the lower levels we saw in 2021 and early 2022, I imagine the values of these ASX 300 shares' properties would be a lot higher than they are today. And, yesterday's rate cut helps take a step towards the REITs' future 'normalised' value.
Search for yield?
With interest rates now lower, I imagine this will mean Australian savings accounts, term deposits, and bonds will reduce the interest rate on offer. The low-risk returns are seemingly going to reduce a little after this rate cut, and there could be further cuts to come.
Aussie investors may decide to switch out of savings accounts and, instead, put their money into ASX dividend shares. REITs could be a possible home for that money because of the largely predictable rental profits and distributions they offer. I'd prefer to buy these ASX 300 shares while they still seem undervalued.
The Centuria Industrial REIT share price has dropped 30% since December 2021, and the Charter Hall Long WALE REIT share price has declined by 27% since April 2022. I think these declines can unwind, thanks to lower interest rates and higher future rental profits.
Rising rental income
These two ASX 300 shares have experienced like-for-like rental growth over the last few years, with contracted increases built into the leases.
I think they'll continue showing rental growth in the coming years, which will help increase distributions for investors and improve the companies' underlying value.
When you consider all these factors, I think it's a great time to invest in these two ASX 300 REITs.
