A positive signal

PROPERTY VALUATION AND FUM UPDATE

Need To Know

• Office asset revaluations ‘less bad’ than market expectations. Industrial & Logistics remain strong 
• Group Property FUM resilient over the period, ~1% decline
• Positive sign that asset revaluations are not as bad as what the market was expecting

Charter Hall came out with its June 2023 property revaluation and funds under management (FUM) update.

98% of the group platform properties have been independently valued at a net decline of A$1.9bn. Group Property FUM is expected to be ~A$72bn for 2H23 (a ~1.3% decline vs 1H23), largely in-line with market expectations. 

The Breakdown:

Segments and Sector Readthrough:

1. Industrial and logistics: Segment continues to perform well. Cap rates are only seeing minor expansions and property valuations across the market have remained relatively flat. Similarly, National storage REIT (NSR) announced it expects cap rates to have remained flat on December levels. Occupancy near all-time highs. Positive readthrough for Dexus (DXS), Goodman Group (GMG) and GPT Group (GPT).
2. Office: Better than expected. Only minor movement in valuations versus what the market has been pricing in for the sector. Similar to that of Challenger (CGF) which posted ~5%. For DXS, GPT and MGR likely a positive read through. Market pricing in a >20% decline in asset valuations for these operators. Likely the market remains somewhat suspicious on the revaluations given the recent office transaction from DXS.  
3. Retail: Shopping centres and retail cap rates continuing to expand as foot traffic remains on its way back to pre-COVID levels. Expect that services-based developments should lift foot traffic in longer term but likely to see some short-term headwinds from slower consumer demand. 
4. Long WALE and social infrastructure: Segment income is heavily CPI linked so not unexpected that we see valuation downside. 

Investment View

Positive news for CHC. Given ~40% of CHC’s portfolio is exposed to office, we believe the market was expecting a far more significant decline in asset valuations. The only minor decline in FUM should lead a resilient fee collection over the period which we expect will allow the group to comfortably meet its EPS guidance. Operating EPS guidance for FY23 is expected to be no less than 90cps, the market is above this at 92cps given the company achieved ~50.7cps in the first half. 

CHC trades at a PER of ~13x vs its long-term average PER of 17x, representing a >1SD discount. We believe that the hesitance around lifting the multiple is driven by two key factors 1). Asset exposure (e.g., Office) and 2). Worries around maintaining FUM (a story which has been developing for some of the Australian fund managers). For the most part, we believe these fears will be partially eased post this release, although greater clarity will come through at the August result.  

We note that the development pipeline remains robust. Industrial assets remain limited, supply is increasing although is not increasing enough to lift tight vacancy levels. Positive for CHC’s ~A$6.3bn pipeline. The A$3.1bn committed office pipeline is seeing strong levels of pre-commitment and should benefit of the decreasing trend of WFH optionality. 

We re-affirm our Buy rating as we see upside at current levels. 

Figure 1: Property FUM by sector. Investors remain heavily focused on the large office exposure