Headwinds wane & tailwinds blow
After starting 2024 with a bang on hopes for speedy interest rate cuts, the real estate investment trust (REIT) sector has since been at the mercy of changing expectations around official interest rates.
It was thought interest rate cuts would come to fruition as inflation returned to the 2-3% Reserve Bank of Australia (RBA) target band. However, surprisingly strong first-quarter inflation data pushed the rate cut timetable to later in the year, throwing cold water on some of the sector’s promise.
Global investor T. Rowe Price, for example, moved to ‘neutral’ from ‘overweight’ on REITs in April, citing an expectation that bond yields would move higher due to sticky inflation.
REITs are sensitive to higher interest rates because they increase the cost of borrowing. Higher rates also tend to decrease the value of properties. Elevated interest rates can also make the relatively high dividend yields REITs offer less attractive on a risk-reward basis.
While interest rate cuts are still not expected until late in the year, tailwinds for the ASX-listed real estate sector are once again starting to blow.
Economic data is beginning to show a slowdown in the Australian economy, with the jobless rate rising to 4.1% in April. The March quarter wages data also proved to be softer than expected, which may help slow sticky services inflation. The recent data keeps the prospect of an interest rate cut on the table by the end of the year and largely rules out an interest rate hike.
