Winston’s Weekly: Building approvals and A-REIT Index composition

By Manny Anton | More Articles by Manny Anton


The following transcript was AI-generated.

Manny Anton: Good morning and welcome to this week's edition of Winston's Weekly: covering all things property. I'm Manny Anton, your host for today's property Chat. Winston, welcome back.

Winston Sammut: Thank you.

Manny Anton: Now, we missed last week's edition of the of the Weekly as we were impacted by Easter. So we've got a couple of weeks worth of news to cover today. So why don't we get started now? There have been some big moves in the property sector over the last couple of weeks, particularly this week as rates again came into focus, particularly in the US after some "softer data points", and this was reflected in some of the moves in equities across that sector in the US. But we also saw some some pretty decent moves domestically in our own property space. What are your thoughts around some of these moves in the last couple of weeks? And what's your reaction to some of that?

Winston Sammut: Well, the sector has been doing very, very well over the last 3 to 6 months. In March, the sector was up over 9%, the REIT sector, and which which is a good month. It outperformed the general equities sector and market pretty well. And it's up 16% for the March quarter and it's up nearly 40% for the last six months, which are very, very big moves. And obviously this week we've had a bit of a sell off, which we'll talk about later. But I suppose a lot of people are looking to take profits and but the sector still looks reasonably well-placed, particularly if we get some interest rate cuts.

Manny Anton: Alright. So basically what you're saying is we should be thinking in terms of that the sector has performed very well.

Winston Sammut: Yes.

Manny Anton: So the fact that there's a pullback here or there is neither here nor there.

Winston Sammut: Correct.

Manny Anton: You've got to keep in mind that it has performed extraordinarily well. Okay understood. Alright, let's move on to more domestic matters then. Now, residential housing again continues to be front and center in the press. You know, every time you pick up a paper, there it is. Now, yesterday, interestingly, we saw building approvals numbers that came in and they surprised on the downside, they actually fell 1.9% month on month in February versus the market's expectations of a 3% rise. So that was that was a quite a surprise, I think. What's your take on those numbers and what do you see as the impact on residential and the outlook?

Winston Sammut: Well, one of the things that sort of impact that is, is the issue of supply and demand. We certainly do need a lot more housing, but it doesn't seem to be translating through in terms of new housing. And I think a lot of people are sort of stepping back in terms of getting finance until they get a better picture of what really is going to happen with interest rates. And that's feeding through into the lower demand. Also remembering again in terms of supply and demand, a lot of builders over the last 12 months have actually disappeared. So it's on the supply side. That's that's it's not good for for for the economy. And and for the industry. And so there's a bigger focus on existing houses rather than new houses. And that's also helping push up prices in the existing home sector. But look, I think once everybody knows what's happening with interest rates, the picture will be a lot clearer and I expect things to pick up then.

Manny Anton: Okay. I mean, obviously, the expectation is that at some point (when that will be we're not really sure) but but at some point the RBA will switch to a you know, to an easier position on on rates. Now, if rates do start to fall, won't that supercharge that residential housing market?

Winston Sammut: Well, we get back to the supply and demand situation in that there's only so many houses that can be built by a limited number of builders. Labor is obviously an issue going forward, but by the same token, I think the issue of interest rates is going to depend on the inflation numbers. And so we just have to wait and see what's happening with with inflation going forward. But when you say fuel, there's only so many houses that can be built at any one given time. And so hopefully that will bring about a more of a balance between existing homes and newly built homes.

Manny Anton: Okay. Now, I did want to ask you something; so say turning to the ASX listed space, and it's becoming increasingly apparent that that the listed domestic property sector is being driven by a very narrow group of stocks in the index. And, you know, you've seen obviously we've seen the performance of the property index. Now primarily it's Goodman. That's been doing a lot of this driving. And there is some some discussion and some concern in the market that Goodman is now so overwhelmingly large, in the context of the index, it is the sole determinant on which direction the index moves and by how much. What are your thoughts on that particular discussion? And what are the risks that the market is concerned about here, and having a stock of that –

Winston Sammut: Well, Goodman is now getting close to being 40% of the A REIT index, which is a very large number. But if you go back in time, Westfield in its day was a large constituent. I don't think it got to 40%, but it was a large constituent. The thing about Goodman's though is that at the moment a lot of the general equity guys and a lot of the offshore investors look at Goodman from a perspective as a global entity, It's got growth, it's exposed to quite a number of international markets. It's being well managed. Its gearing is very low. So it is attractive from that perspective. And what is really taking place is that the equity guys and the international guys are taking Goodman as the proxy for the sector overall. Goodman is actually up 70% over the last 12 months. But there is another stock that was up actually 80% over the last 12 months, and that's HomeCo. So even though Goodman's was up, but HomeCo. is a much smaller constituent of the index.

It's something akin to the Magnificent Seven in the US, where there are seven stocks are the ones that are driving the market in the REIT sector in the 300 index is only 30 odd stocks. So Goodman's, Charter hall, Stockland, Mirvac, GPT, they're the ones that are driving the sector and they're large and they're liquid and investors can get in and get out fairly quickly. So it does tend to provide a lot of volatility and I suspect that over the course of this week and the next week, we'll probably see some easing of in the index itself and the exposure to Goodman.

Manny Anton: Okay, great. And moving on to the M&A front. Charter Hall made some moves last week.

Winston Sammut: Charter Hall acquired a nearly 14% stake in hotel property investments, which was sold down by Tony Pitt. Tony Pitt in 360 Group had built up a decent stake in the stock over the last 12/24 months, and Charter Hall took advantage of that. And they put that investment into a separate trust with a 50/50 between Charter Hall itself, the main stock and charter hall retail. Now, whether there's going to be some M&A activity going forward. The issue at the moment really is that neither Charter Hall nor CQR have the capacity to actually make a full bid for it for the stock. CQR's gearing is is up there at the moment. Charter Hall's gearing is low, but traditionally it likes to maintain that gearing level low. So whilst it does invest in those sorts of ventures with its own money up to a certain percent, whether it's 10% or 20%, they wouldn't be they wouldn't be providing the cash to take it out altogether. So I think it's probably more a wait and see approach and to see if they can get some capital partners to come in over time and probably take the stock out.

Manny Anton: All right. Understood. Before we leave the M&A space, just checking in with you. What is the latest news on the BWP/Newmark takeover?

Winston Sammut: Having gone on conditional last Thursday week. Bunnings is now up to, in the mid seventies, percent of the stock. They've got till next Friday (the 12th) because it's a final offer, so they can't extend the time or the price or anything. The issue now is whether they can get to 90% and then compulsorily acquire the balance. So I think a lot of people are sort of waiting till the last few days to accept. So we expect to see a flurry in the next week or so.

Manny Anton: Okay. And let's move on to Euree Asset Management. How's Euree going these days? How's the performance and how's it progressing?

Winston Sammut: The performance is going well. We tend to sort of underperform when markets are strong, Marginally, not by a hell of a lot. But we do outperform when markets pull back and that's what seems to be happening over the course of this week. So we're looking reasonably good at this stage.

Manny Anton: Great. Alright. Well, just to wrap it up, anything we should be looking for next week in the property space? is there any looming large announcements?

Winston Sammut: Nothing that that sort of stands out at the moment. The issue now is, in terms of what the expectations are for interest rate cuts. And as I said, it's all about timing, rather than whether they're going to happen or not. But it seems to be being pushed out. If you look at three or four months ago, everyone was talking about six or seven rate cuts in the US starting in in March, April, May, June. Now that's being pushed out to maybe two or three cuts over the course of the year and and the timeframe is being pushed out.

So there's a bit of uncertainty around the place. But on the other side of the equation, that's happening because the economy, particularly in the US, is going very, very well. And so they don't want to chance the issue of of bringing inflation back into focus – and a similar situation here in Australia. Even though I think expectations are high in Australia, that rate cuts will come much, much later in the year.

Manny Anton: Okay. Before we go, I will sort of make one point. The non-farm payrolls in the US are due out tonight.

Winston Sammut: Yes.

Manny Anton: Now that is that the US traders and investors are very, very nervous about that number. So that is due out tonight. And if it comes in well ahead of expectations, I think they are looking for 200,000. If it comes in well above that, it could be on! You know, we could see bond yields rise quite aggressively overnight. And that will that will be interesting in how the the equity markets react to that. If that number does surprise on the upside is a risk overnight,

Winston Sammut: We may have to come to work with some nappies on.

Manny Anton: Yes, indeed. All right. Winston, well, thank you again for your time. That was fantastic. And we'll be back with with another edition of Winston's Weekly next Friday. Until then, have a great day and a fabulous weekend.

Winston Sammut: Thank you.