Grant Berry
There continues to be exceptionally high quality opportunities in Australian real estate investment trusts (AREITs) which can deliver attractive and sustainable yield for investors, says Grant Berry, portfolio manager at SG Hiscock.
“While the economic recovery in Australia is well underway, it still has some way to run and we are particularly seeing this in AREITs where there are still assets that are underappreciated by the market.
“Low price doesn’t necessarily mean low quality at the moment, and we are still in the early stages of the rotation away from growth, which means that a number of good quality groups are still undervalued.”
Mr Berry pointed out that taking a conservative valuation approach and building in a rise in bond yields, the SGH property portfolio is considerably cheaper than the AREIT sector overall.
“This is primarily due to our focus on companies that provide rental income as their main business, not those that are also undertaking other activities such as development or funds management.
“Over the past five years or so, there has been a huge shift within the AREIT sector where there are now a big proportion of groups that generate much of their operating earnings from activities other than owning and renting out properties, which creates risk for those taking an index approach.
“We believe that investors who focus on real assets and rent generation will benefit in the over the longer term,” Mr Berry said.
He also said that feedback from advisers shows that most have a preference for listed property in their clients’ investment portfolios, with the pricing of traditional REITs compared to direct property a key reason for this.
“When we surveyed some clients recently, over three quarters said that they prefer listed property over direct property, and over 90 percent said that the pricing of REITs is more appealing relative to direct property.
“Investors can also benefit from exposure to property sectors that they can’t otherwise easily access, some of which are experiencing good momentum at the moment.
“For instance, retail has undoubtedly had a challenging year but there are some real positives at the moment.
“Household balance sheets are in great shape, boosted by the limited travel opportunities over the past 12 months along with the wealth effect of rising house prices. Coupled with very high consumer confidence levels, and momentum in foot traffic data, we believe that retail is showing good potential.
“The office sector is also in an interesting place right now. The rise of “working from home” will definitely have an impact but at the same time, most people recognise the benefits of spending the majority of their time in an office environment.
“Certainly this is having a material impact on lower rental growth outlooks, particularly in CBD locations. However, we have been increasing our exposure to suburban offices with have lower rents, good parking and more favourable tenancy demand. There are a number of office exposed REITs whose security prices are approximately 30 percent lower
“Overall, we believe that business conditions will trump disruption as the long term driver, and at the moment business conditions are rebounding strongly,” Mr Berry said.
