From fear of inflation to fear of recession, and 2 factors to drive AREIT outperformance

Amy Pham

Pengana Capital Group

The Australian REIT sector continued its rollercoaster ride of performance, delivering a +5.2% return in April, after the RBA’s pause in rates at 3.60%.

The unexpected 25 bps cash rate rise to 3.85% on 3 May 2023 took the market by surprise, having expected the RBA to pause for the second time following its decision in April.

Whether the RBA continues to raise rates will depend on the unemployment rate and what’s happening in the U.S., with the market currently pricing in for a recession by the end of the year. This is reflected in the inverted yield curve where the Australian 3-year bond yield is below the cash rate.

Looking at the health of the economy, inflation is still high at 7% (well outside the 2%-3% RBA target range), employment levels are still strong (with the unemployment rate at 3.5%), the housing shortage, and affordability, remains a concern with vacancy rates at an all-time low (<1%), and with strong recovery in migration expected over the next two years.

So how are we positioned?

The market will remain jittery as inflation remains high, but the risk now seems to shift from high inflation to slowing growth. As we enter into a weaker economy, this tends to drive earnings downgrades and the outperformance of defensive over cyclical sectors.

For AREITs this means convenience retail over discretionary, and alternative assets such as healthcare, childcare, and retirement living over core office, retail, and industrials.

As interest rates stabilise, we are starting to see more confidence in the recovery of residential fundamentals with the CoreLogic home value index data released in early April posting a +0.6% monthly gain. This was the first month-on-month gain in national house prices since the housing downturn started in May 2022.

There are two factors why we think residential REITs will outperform over the medium term:

  • With the embedded lack of housing supply (vacancy rates <1%) and affordability issues in Australia, we believe that housing, especially affordable housing, will continue to be supported; particularly as migration is set to pick up remarkably in the next couple of years (700,000 new migrants expected to come to Australia by the end of 2024), well above the long term average.
  • Rate hikes are slowing, which should be supportive for residential markets, and more importantly, the market is pricing in a rate cut later in the year as the risk of the U.S. going into a recession increases.

Investors could be wise to support defensive retailing with exposure to convenience retail anchored by supermarkets and essential services, and exposure to affordable housing such as Stockland Group (SGP), Lifestyle Communities (LIC), and Peet Group (PPC).  

Pengana Capital Ltd (ABN 30 103 800 568, Australian financial services license number 226566) is the issuer of units in the Pengana High Conviction Property Securities Fund (ARSN 639 011 180) (the “Fund”). A product disclosure statement for the Fund is available and can be obtained from our distribution team. A person should obtain a copy of the product disclosure statement and should consider the product disclosure statement carefully before deciding whether to acquire, or to continue to hold, or making any other decision in respect of, the units in the Fund. This report was prepared by Pengana Capital Ltd and does not contain any investment recommendation or investment advice. This report has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on any information contained within this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs. Neither Pengana Capital Ltd nor its related entities, directors or officers guarantees the performance of, or the repayment of capital or income invested in, the Fund.

3 stocks mentioned

Amy Pham
Fund Manager - Pengana High Conviction Property Securities Fund
Pengana Capital Group

Amy is portfolio manager of the Pengana High Conviction Property Securities Fund, and has over 20 years of property funds management experience. Previously, Amy has worked at Charter Hall/Folkestone for 6 years, managing a high conviction...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Please sign in to comment on this wire.

trending on livewire
Get the best of Livewire by signing up to our popular daily newsletter