In Brief: House Prices, REITs, Commodities & Superannuation 

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Republished to remove confusion between Citi and Barrenjoey in A-REITs story.

House prices and affordability, preferred REITs during sector outperformance; commodity forecasts and stock preferences & record lows for superannuation fees.

-Rising incomes, not falling house prices, will ease affordability 
-Preferred REITs during sector outperformance versus the ASX200
-Barrenjoey’s commodity price forecasts and stock picks
-Superannuation fees fall to record lows

By Mark Woodruff

Rising incomes, not falling house prices, will ease affordability 

Greater house price affordability in advanced economies will arise, believes Oxford Economics, not due to a further house price correction but as a result of a gradual rise in household incomes.

It’s felt an end to rate rises, broader easing of credit standards and lower leverage should ensure this rise in income, assuming a benevolent outlook for labour markets. 

Labour markets, rather than the financial sector, is where one should look for housing market risks this time around, suggests Oxford. Currently, only a gradual worsening in both unemployment and real incomes is expected.

House prices are in retreat in almost all major markets globally, though almost none of those markets have fully erased the gains since the post-pandemic recovery started, observes Oxford.

The pull-back is running out of steam, and some markets are even experiencing renewed price rises, most notably in the US and New Zealand.

The current lack of housing affordability is evident when looking at the commonly used ratios of housing price-to-rent and price-to-income. Both ratios are above their long-term trends in almost all advanced economies, where rents and house price growth have outpaced incomes, explains Oxford.

House prices and rents have risen as pandemic-era savings and fiscal support allowed consumption and prices to outpace (slower rising) income.

Outcomes in Australia, Canada and Scandinavian countries may well be different, suggests Oxford, as households haven’t reduced borrowings post-GFC.

Oxford Economics explains once indebtedness rises above sustainable affordability, a slowdown in the business cycle has the potential to cause forced sales and a consequent drop in house prices.

Preferred REITs during sector outperforms against the ASX200

Despite some conflicting global inflation data, Citi senses a pickup in investor interest to ascertain which individual Australian REITs may benefit most from potential REIT sector outperformance against the ASX200.

For the record, the broker forecasts the next potential rate rise is most likely next February, though action by the Reserve Bank in December is not out of the question. 

Recent Citi analysis of past cycles in 2000 and 2010 focused on both the peak of interest rates and the commencement of interest rate cuts.

As rates peaked, the broker noted the REIT sector displayed a negative correlation to bond yields and interest rates, benefiting from both the plateau at the top of the interest rate cycle, as well as the commencement of interest rate declines.

According to historical regression analysis, Citi highlights outperformance for REITs starts 0-4 months prior to the first RBA rate cut.

Top beneficiaries within Residential REITs, according to the broker, will be both Stockland Group ((SGP)) and Mirvac Group ((MGR)), while defensive retail real estate REITs such as BWP Trust ((BWP)), Charter Hall Retail REIT ((CQR)) and Vicinity Centres ((VCX)) should benefit from lower interest rates for both the consumer and the real estate loans.

Industrial REITs should also benefit, including one of Citi’s top picks in Goodman Group ((GMG)), due to its best-in-class financial and operational position.

Value stocks such as GPT Group ((GPT)) and Charter Hall Group ((CHC)) may also be supported.

Barrenjoey’s commodity price forecasts and stock picks

In a tough year for commodities so far, only iron ore and metallurgical coal prices have risen by 11% and 1%, while lithium, thermal coal and nickel have experienced falls of -74%, -41% and -38%, respectively.

Barrenjoey anticipates ongoing tightness in the near-term iron ore market and raises its 2024 price forecast by 5% to US$115/t and assumes the price remains above US$100/t through to 2026. The long-term price forecast is also raised to US$80/t from US$75/t.

The broker upgrades its ratings for Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) to Overweight and Neutral, respectively, while maintaining a Neutral recommendation for BHP Group ((BHP)).

While the analysts believe the lithium chemical inventory has normalised, the current issue is a build in battery inventory.

As a result, Barrenjoey makes material forecasts changes in the battery raw material space, with -15-40% price downgrades to lithium, nickel and rare earths prices.

The broker’s spodumene forecast is for US$1,500/t in 2024, with a severe correction bottoming in the first quarter. Due to the potential fast growth in demand of anything between 15-40% next year, it’s felt the market has potential to rebalance faster than other historical commodity price corrections.

Spot prices for lithium carbonate, hydroxide and spodumene all peaked in November 2022, and have declined precipitously throughout 2023. Barrenjoey explains a powerful stocking cycle occurred across the supply chain in 2022 and gave way to a build-up of inventory, initially at the converters and cathode manufacturers, that has since moved down the chain to battery and manufacturers of EVs in China.

Among the emerging lithium producers both Leo Lithium ((LLL)) and Global Lithium Resources ((GL1)) retain their Overweight ratings.

Following a big third quarter fall in price for thermal coal, the broker believes prices will find support in the US$120-130/t range and should represent a better relative trade versus met coal.

In light of this view, the analysts prefer Whitehaven Coal ((WHC)) to Coronado Global Resources ((CRN)), which is downgraded to an Underweight rating.

The broker's 2024 gold price assumption is raised to US$2,000/oz to reflect recent spot price strength, while 2024-26 price forecasts for rare earths are lowered by around -15-30% to reflect well-supplied markets. 

Among industrial metals, nickel has been the biggest decliner this year, driven by increased supply from Indonesia and the fallout from a deterioration in sentiment towards the electric vehicle (EV) sector, explains Barrenjoey.

Nickel is the broker’s least preferred base metal with rising Indonesian supply expected to weigh on prices. Also, a rapid rise in cheaper lithium iron phosphate adoption for battery production [compared to nickel cobalt manganese] is raising concerns about longer-term nickel demand. 

Overall, Barrenjoey prefers resource companies with robust balance sheets, funded growth, and the ability to generate strong cashflow with dividend upside. 

For investors seeking exposure to battery raw materials, Barrenjoey has Overweight ratings for Lynas Rare Earths ((LYC)), IGO ((IGO)), Allkem ((AKE)) and Mineral Resources ((MIN)).

In terms of the ASX Gold sector, the analysts are expecting better cash flows due to a near record-high for the Australian dollar gold price. 

Overweight-rated Newmont ((NEM)) is the most preferred exposure given the opportunity to regain a premium rating to peers from bedding down the Newcrest Mining merger, executing on asset sales and potential for an upcoming buyback.

Superannuation fees fall to record lows

In a good result for consumers, superannuation fees have fallen by -2% over the past year to 0.93% per annum, the lowest total expense ratio on record.

MySuper, which acts as a default account for people who don’t choose their own super fund when they start a new job, is the most competitive segment, covers the most members, and over the past year average fees declined to 1% from 1.05% per annum as of June 30 this year, according to research from Rainmaker Information.

Rainmaker, which is owned by Institutional Shareholder Services provides marketing intelligence, research, and consulting services on the wealth management industry. 

For the MySuper products, fees are now level for retail and not for profit funds, with the latter offering lower administration fees, while retail products have lower investment fees on average, explains Pooja Antil, research manager at Rainmaker. 

Personal and retirement products still charge per annum fees of 1.16% and 1.07%, respectively.

Funds under management (FUM) for superannuation funds in Australia has grown to $3.5trn from $3.3trn this year, an increase of 1.5% while fee revenue grew by 3%.

This discrepancy highlights a potential diseconomies of scale effect, which may attract regulatory attention soon, suggests Pooja Antil.

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