Ms Pham said property’s defensive nature should come into play across 2023. “As we head into a more challenging economy in 2023 listed property’s defensive characteristics, such as regular CPI-linked rent reviews, may become more compelling to investors.”

Ms Pham said AREITs have rarely been this cheap and there is a good argument that many AREITs were oversold during 2022. “The sector is trading at an 18% discount to NAV and close to 20% discount to NTA (excluding the fund managers such as Charter Hall Group and Goodman Group).

“Relative to Industrials, the AREIT sector is trading at 15x PE, a 2pt P/E discount to the ASX industrials and a reasonable discount to the relative long-term average.”

Currently, the AREIT sector is offering a forecast yield of 6% with a sustainable earnings growth of 4%.

With reporting season underway, Ms Pham said her team was keeping a keen eye on issues including capital management among AREIT stocks. “We remain focused on how companies manage their balance sheets and hedging profiles.

“Well capitalised companies should be able to take advantage of the expected decline in asset values through acquisitions, be less impacted by rising interest expenses and continue to grow their development pipeline.”

Ms Pham says Pengana expects asset values to correct in the order of 13% from their peaks. “Investors’ required returns have risen from around 6.50% at the start of 2022 to 7.25% today due to the rising cost of debt. The sub-sector with the highest downside risk in our view is office due to the work-from-home thematic, vacancy levels, and high incentives, though some quality office assets are showing resilience.”

Ms Pham says residential REITs have the potential to surprise following a tough period, with several factors hinting at a recovery. “Residential REITs are likely to benefit from the introduction of First Home Buyers Choice, the increase in immigration, and low vacancy rates.

“Interest rates could also have an influence on residential REITs if expectations of a cut later this year come to fruition, however we avoid making predictions on rates”, Ms Pham concluded.

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