While net operating income from A-REITs remains positive, it has moderated somewhat through the year compared to FY07. As anticipated, office was the standout while retail did not fare so well. It is this rental growth which has diluted the negative impact of capital value write-downs as a consequence of the (insufficient) cap rate decompression recognised in A-REIT reporting to date. And when dissected it is core NOI growth which has effectively subsidised the impaired performance of corporate earnings growth. However, occupancy levels in general across portfolios are now not as strong with data indicating some weakening off cyclical highs and anecdotal evidence suggesting tenant incentives are creeping up once more. This leaves the question – by what degree will core operating earnings growth (insofar as the economy can sustain rental increases) offset anticipated further deterioration in occupancy and cap rate decompression? It seems that Australian-centric portfolios should fare better as the supply pipe is moderate. This is where the economy will have the final say with security pricing reflecting the direction of macro trends as it seems that, for now at least, the micro issues have been factored in.
