This is the biggest issue for investors in ASX office REITs in 2022: fund manager

Ask a fund manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part one of this edition, we’re joined by Grant Nichols, fund manager of the $2.4 billion Centuria Office REIT (ASX: COF), Australia’s largest listed pure-play office REIT. Today, Nichols explains how COF has kept its office space almost fully occupied during and after the COVID pandemic, and what’s keeping REIT investors awake at night.

The Motley Fool: COF reported some strong financials for FY22. Those included a statutory net profit of $115 million, up 50% year-on-year; occupancy levels increasing to 94.7%; and 98.2% average rent collection. How did the office REIT achieve that?

Grant Nichols: Leasing across the portfolio underpinned our results for FY22. We had a really good year of leasing; 41,000 square metres of net lettable area, which is about 13% of the portfolio NLA.

And that’s continued on what has been a very good leasing story across the portfolio for quite some time. Since the outbreak of COVID, we’ve leased in excess of 120,000 square metres of space. Which is about 40% of our portfolio’s net lettable area.

This is in contrast to some of the media stories we’re hearing about the concerns for ongoing tenant demand for office space. What we’re seeing across our portfolio is we’ve completed a lot of leasing; we’ve been able to track and retain a lot of our tenants and increase occupancy. So, it’s been a very good story.

The reason we’re able to do that is primarily due to the portfolio we’re providing.

We’re certainly seeing the flight to quality from tenants. Tenants are looking to get into better quality office space. And we have one of the youngest portfolios you can invest into, with the average age of our assets being around 16 years.

We feel we’re providing an accommodation solution that’s meeting the needs of the tenants, at the moment.

MF: On the topic of COVID, have you noticed a big bounce back in office space demand from the pandemic shutdown periods?

GN: We didn’t have any material deterioration in tenant demand through COVID.

There’s a lot of talk in the market about office occupancy. And that’s because there is now a more versatile work opportunity. People are working from home more than they were doing before COVID.

But tenant demand across our portfolio hasn’t materially changed.

What you need to think about is that if people are working from the office on Tuesday, Wednesday and Thursday, that doesn’t mean that office space, or your tenant footprint, contracts by 30% to 40%.

Because, ultimately, the whole point of having a centralised workplace is allowing all the staff to be in the same place at the same time, cooperating and communicating. And if you’re not providing that opportunity, it reduces the benefit of having that centralised workplace.

So, what we’re seeing across our portfolio is that tenant footprints aren’t materially changing. In fact, in some cases they’re increasing as tenants want to provide more breakout space for that kind of cooperation.

It’s just that the tenant occupancy within that accommodation may not be as used as it was pre-COVID. So instead of having 80% occupancy five days per week, it might be 80% occupancy for three days per week.

That’s where we’re seeing a change.

MF: Circling back to the strong FY22 results your ASX REIT posted. Despite those numbers, investors pushed down the COF share price by some 8% on the day of the results release. What do you think caused that?

GN: The biggest issue investors have at the moment is what the impact of rising interest rates will have on not only office but commercial property generally.

There are two items to that.

There’s the velocity of the interest rate change. I don’t know if we’ve ever been in a situation that’s seen interest rates increase at the rapid rate that we’re seeing at the moment.

Also, there’s still conjecture about where the neutral rate will moderate going forward.

I think most people are in agreement that the neutral interest rate will be lower than what it has been in the past. But there’s still conjecture in regards to what level that will be.

That’s where the concerns for investors lie across the [real estate investment trust] REIT market, that caution around interest rates.

Once there’s a greater consensus around where interest rates are going to moderate, I think that’s where you’ll see more confidence from investors looking at commercial property and commercial property REITs.

***

Tune in tomorrow for part two of our interview, where Centuria’s Grant Nichols looks at two tailwinds the office market could receive from rising inflation.

(You can find out more about the Centuria Office REIT (ASX: COF) here.)

The post This is the biggest issue for investors in ASX office REITs in 2022: fund manager appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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