The Point

Julia Forrest: Retail and industrial lead the way in A-REIT sector

A surprising rebound for shopping malls was the standout feature of this year’s real estate investment trust reporting season, says Pendal’s Julia Forrest.

Rising interest rates and the expiration of interest hedges meant earnings declined for many Australian REITs, surprising investors in a sector where performance is typically well-flagged.

“But the positive surprise was in shopping malls where operating metrics improved,” says Julia who co-manages Pendal’s property trust portfolios.

“Occupancy is pushing towards completely occupied – that’s a long way from where we were two or three years ago.

“There’s genuine demand by tenants for more – and better – space and there’s been no supply for four or five years so you’re seeing competitive tension between tenants.”

A rising population and wages growth has sent retail sales 15 per cent above 2019 levels.

Office property opportunities can still be found as work-from-home tensions play out

Office space is on the mind of many businesses as WFH tension between workers and bosses plays out.

The market is continuing to evolve, providing plenty of challenges – along with some opportunities, says Julia Forrest, co-manager of Pendal’s property portfolios.

“It’s been very hard to get people back into the office,” Julia says. “And it seems to be more difficult in Melbourne than anywhere else.”

“Physical occupancy in Melbourne is running at about 47 per cent, but recently there’s been some big employers mandating staff to be back in the office 50 per cent of the time,” she says. “That will help.

“Physical occupancy is still low in government because staff have only been mandated to come back to the office one in every five days.”

There are still opportunities in commercial property, though.

Julia points to newly developed 555 Collins Street in Melbourne. It has a good range of tenants including Amazon, will open close to fully tenanted and the construction contract was well negotiated.

Julia Forrest: Where to look for opportunities in listed property

Investing in listed property when bond yields are higher – and recession fears abound – may sound challenging.

But there are opportunities for REITs investors who know where to look, says Julia Forrest, who has co-managed Pendal’s property trust portfolios for more than a decade.

“You want a portfolio with inflation protection, and you want to own assets that have pricing power.

“We are over-weight supermarket-based shopping centre REITS, because the big supermarkets have reasonable pricing power and demand is fairly resilient.

“We are also overweight logistics and industrial REITS.

“The landlords have pricing power because the vacancy rate is so incredibly low. Their ability to charge market rents means you have reasonable earnings growth and protection against inflation.”