Property funds manger face tough road as amid share market turmoil

The real estate sector was once heralded as defensive but has lost its lustre as running funds and development has taken off. But, bargains are emerging.

HMC Capital managing director David Di Pilla is under pressure as his REITs drop in value. Picture: Jane Dempster

The real estate investment trust sector’s mantle as a safe haven in times of market distress is looking shaky, with marquee stocks dragged down in the turmoil.

Large capitalisation stocks, led by global industrial powerhouse the Goodman Group, and the managers that sit outside the index, such as the once-high flying funds manager HMC Capital, have sunk in the turmoil sparked by the Trump administration’s shock tariffs.

Investors punished real estate companies that depend on their funds management operations growing and undertaking risky developments in new fields, as they fled for the relative safety of stocks backed by hard assets.

Over several days of volatile trading, the sector was weighed down by the Goodman Group, which has been caught up in the unwinding of the data centre trade and fears that tariffs would hit trade flows, crimping demand for industrial property.

The stock hit a 52-week high of $39.43 in early December. It lost $1.01 on Monday to $26.38. Other funds players have been hit hard, notably David Di Pilla’s HMC Capital, which plunged by about 11 per cent on Monday to $4.54, before paring losses to $4.96.

It is down from a 52-week high of $13.16 in late November ahead of the ill-fated float of data centre fund DigiCo, which was trading at less than half its $5 float price on Monday. Property funds groups Charter Hall and Centuria Capital have been sold down, albeit to a lesser extent as growth stocks have been pushed aside for those that deliver more steady returns.

Pendal Group head of listed property Pete Davidson acknowledged the sector had come off, partly due to Goodman’s exposure to data centres, which had previously driven an uplift which had now corrected.

Artist's impression of the Goodman Group's data centre in Artarmon, Sydney.

He pointed to the likely downward trajectory of interest rates and bond rates as a positive for REITs, particularly for those which are simple landlords. By contrast, more capital-dependent fund managers could be affected if the flow of equity capital gets interrupted and they face ructions in the debt market. “More complex manager models probably have a difficult period for a few months,” he said. “Traditional commercial real estate sectors will be better or largely intact, and demand for those is good.”

Mr Davidson remains supportive of Goodman’s model and rollout of new data centres but said investors were looking at the performance of US tech stocks.

Quay Global Investors co-founder and portfolio manager Justin Blaess said the starting point for listed real estate in the global context was very different from the global financial crisis.

“We’ve got stocks in our portfolio where the share price is back where it was five or 10 years ago, but the earnings are 40 per cent to 60 per cent higher,” he said. “The balance sheets are a lot better and that would make me just feel that the general level of risk on listed real estate is a lot lower.”

Mr Blaess said the market had focused on tech stocks over the past five years and real estate investment trusts had de-rated. He compared the current shock to the dotcom bubble and the period afterwards in which real estate had shifted from being shunned as “old economy” to swinging back into favour.

Another local funds manager said investors were chasing physical assets focused on domestic consumption to maintain value, with Charter Hall Retail REIT, HomeCo Daily Needs REIT, Region Group, Vicinity Centres and Scentre Group as holding some ground despite being hit in the week of turmoil. The manager warned the sector would face the prospect of rising credit spreads, though they are yet to jump. “Private credit and private equity has to be in a world of pain as the normal exit strategies close.”

Resolution Capital founder and chief investment officer Andrew Parsons said real estate investment trusts were priced at “very undemanding” levels, “trading at below replacement costs with low supply weighing on the sector. They aren’t directly affected by tariffs. The Australian dollar weakness means the local sector is on sale”.

“Trump’s policies create enormous challenges for corporate America and will encourage the rest of the world to rejuvenate – just like Australia found new trading partners and customers when China slapped tariffs on us a few years ago,” he said.

However, Mr Parsons warned that corporate equities were facing profit margin pressure, particularly in the US. “There’s going to be greater scrutiny on real value and cashflows from business concepts that have been over-hyped and overpriced. Investors will view real estate as being relatively secure, and generating income to live on, not the reliance on fickle capital growth.”

He said A-REIT capital positions were strong and the sector did not need to raise equity capital and refinancing needs were manageable, though he also warned about the use of low-quality private credit. “This is indiscriminate selling of a sector which is well placed,” Mr Parsons said.

Originally published as Property funds manger face tough road as amid share market turmoil