Quality is key as ‘oversold’ A-REITs offer good opportunities
Quality is key for listed property trusts as the A-REIT sector rebounds from a selldown in early 2022 while navigating high inflation and potential interest rate rises later this year, which has opened up some good buying opportunities. We think the A-REIT sector has been oversold given the underlying strengths in the sector.
Valuations have remained buoyant and there are growing expectations rental collections will rise, and we will see improved visibility of earnings. Balance sheets generally look good, with the sector’s average gearing levels at 28%, supporting further growth through acquisitions and development.
Earnings forecasts are also positive amid an improving economic backdrop.
The selldown provided a good opportunity to consider quality A-REITs, many of which improved their position across the pandemic. “There are currently some outstanding quality
stocks such as Charter Hall, Goodman, and Centuria, which recently upgraded their guidance and have the highest earnings growth in the sector.”
Adding alternative real estate investments can provide additional opportunities to negotiate inflation and rate rises. The alternative sector is mainly driven by secular trends and is less cyclical, providing a potential hedge against inflation. Some of these assets are considered necessities, such as healthcare, childcare, and even data centers, which are all relatively well insulated against the cycle.
If interest rates were to increase later this year, some investors may become more tempted to follow ‘yield traps’. We often see investors rush to higher-yielding stocks during high inflation and higher interest rates. But chasing the yield could backfire if the quality is not there.
We think the best way to protect property portfolios from inflation, interest rates, and volatility is via high-quality stocks and alternatives.
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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...