Source: Bloomberg, Catalyst Fund Managers, 2022: as at 30 June 2022

The sector’s discount to NAV at the end of the June 2022 was 32%, which continues to be below the historical 5-year discount to NAV of c. 18%.

NAV growth is expected to be subdued at best due to potential capitalisation rate expansion and the possibility of further downward revisions to market rental growth assumptions.

Capitalisation Rates:

Rode’s second quarter 2022 capitalisation rate survey indicated that capitalisation rates of retail and industrial assets weakened slightly while office showed a marginal improvement. Nationally, capitalisation rates in prime industrial leasebacks (9.6%), grade-A multi-tenanted decentralized office buildings (11.1%) and regional shopping centres (8.9%) remains higher than pre-pandemic levels.

Over the medium term, we see potential risks of capitalisation rates moving out due to structural changes and the relatively elevated long bond yields currently.

Market rental growth:

Valuers have historically factored in rental growth of between 5-6% in valuations. According to MSCI data, this has been revised lower across most segments due to a weakening of property fundamentals.

Market property expenditure growth:

Property expenditure growth has remained stubbornly high over the last few years with growth rates in excess of headline inflation. SAPOA research indicates that property expenditure is assumed to grow at 7.2% per annum over the medium term due to the high likelihood that administered costs will continue to grow above inflation.

Escalations and Reversions:

Reported escalations on new leases continue to trend lower, with the trend expected to persist in the short to medium term. Due to the oversupply in most subsectors, high vacancies, and lower market rental growth forecasts, we see negative reversions persisting over time and impacting on like-for-like net operating income growth.