A turning point for AREITs this year may not ‘lift all boats’

A turning point for AREITs this year may not ‘lift all boats’

2024 could be a turning point for AREITs following a period of rate hikes and rising bond yields. While we don’t have a crystal ball, the consensus view is that we are at or close to peak interest rates, which will be supportive for the sector this year.

Australia tends to follow the US, and after a soft US CPI print in November, the market is now factoring in a rate cut as soon as first quarter of 2024.

We saw bond yields locally and in the US retract below 5%, and the AREIT sector delivered close to 11% return for the month.

Any recovery in AREITs over 2024 will not be a case of a rising tide lifting all boats. There will be some AREITs that continue to be impacted by the high-interest rates and struggle to generate earnings-per-share growth.

We think alternatives will continue to have more presence in Australian real estate through 2024 and beyond.

Attractive valuations

The up-and-coming half-yearly reporting season will be an important one. The market will assess who is best placed to take advantage of the recovery phase.

The Pengana High Conviction Property Securities Fund continued to target quality AREITs, many of which were trading at more attractive valuations over 2023. We have targeted some quality defensive stocks which have attractive leasing structures – for example, Scentre Group has been able to command long leases to major retailers with increases of CPI plus 2.5%.

For investors, the combination of steady income combined with underlying capital growth will always be powerful, and there has been good opportunity to target quality recently.

Alternative property sectors including assets investing in healthcare, childcare, and data centres, would continue to provide counter-cyclical resilience to property portfolios.

We are maintaining our weighting to the alternative sector with minor changes, switching amongst them as we see better value.

Alternative property sectors often provide a way to invest in necessities, which are more resilient during economic downturns. The economy may slow but the need for critical services such as child care or data centres remains strong.

We think alternatives will continue to have more presence in Australian real estate through 2024 and beyond.

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.

As a result, the fund 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.

Pengana Capital Group (‘Pengana’) is a diversified funds management group which offers investors access to some of the world’s best investment teams across several international and Australian strategies.

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