The A-REIT property sectors are each reacting differently to the higher interest rate environment but alternative real estate sectors are a current stand-out, according to Amy Pham, Portfolio Manager for the Pengana High Conviction Property Securities Fund.
Ms Pham said recent quarterly updates shows the only sectors which reported an increase in valuations had greater earnings certainty. “Property assets in childcare, healthcare, and non-discretionary retail reported cap rate compressions as they continue to attract capital flows due to their relatively stable earnings profile.
“Alternative assets such as childcare, healthcare, seniors living and defensive retailing will continue to be relatively insulated. Their certainty of income is based on demand, which is driven by secular trends and long term stable tenancies.”
Ms Pham cited some June 2022 preliminary valuation increases on December 2021 including Arena REIT up 7.8%, HomeCo Wellness REIT up 4.1%, and an increase of 4.6% for HomeCo Daily Needs REIT.
“In other sectors, cap rate spreads to real yields are elevated for retail, on par for office and below average for industrial.”
Ms Pham said the office sector was looking slightly more vulnerable when compared to industrial and retail property. “Further pressure is being placed on rents due to the slow rebound to physical occupancy from pre-COVID levels, vacancy rates of over 12% in major cities and 30% tenant incentives.
“The flight to quality has also seen an increase in capex for older assets dragging on operating income in the near term.”
While industrial would seem to have the most downside risk on the surface, Ms Pham says this does not take into account some ongoing tailwinds. “Industrial has a positive outlook for rental growth based on continued demand and limited supply.
“This has driven rental growth to record levels, which are now up around 10% year-on-year in several eastern seaboard infill markets.
“Whilst growth will moderate, there is potential for high single digit growth to remain over the next two-to-three years, offsetting pressure from higher rates, due to structural tailwinds from the growth in e-commerce.”
About Pengana High Conviction Property Securities Fund
Australia’s only high conviction AREIT fund with an ESG focus: The Pengana High Conviction Property Securities Fund believes each security has an underlying or intrinsic value and that securities become mispriced at times relative to their value and each other, and seeks to exploit such market inefficiencies by employing an active, value-based investment style to capture the underlying cashflows generated from real estate assets and/or real estate businesses.
We believe that responsible investing is important to generate long-term sustainable returns. Incorporating ESG factors alongside financial measures provides a complete view of the risk/return characteristics of our property investments.
All positions are high conviction and assessed on a risk-reward basis, resulting in a concentrated portfolio of 10-20 securities
