Recently, Sequoia Financial Group Investment Manager Winston Sammut spoke to us about
property opportunities and pitfalls in the current economic climate.
On the back of this, this article looks to expand on these points in depth, whilst highlighting the companies that fall within these sub sectors of the A-REIT market.
Currently, there are a lot of REITs yielding 6 and 7 per cent, and they are not in the traditional sectors of the Australian property market.
Non-traditional sub-sectors, childcare and seniors living (as opposed to the highly regulated aged-care sector), currently stands out as an opportunity/safe haven in the current environment.
Both of which are supported by government funding and capitalise on various trends currently presiding within the Australian population.
In regard to childcare, Mr. Sammut notes that "if we are going to have more people go to work, the female workforce is going to be on demand, as it were, to go out and get work. That puts pressure on them to have children looked after."
Female participation in the workforce has risen 2% nationally over the last 5 years to 60.5%, whilst government funding has increased by 33% nationally over the last four years.
However, it is the actual owners of the bricks and mortars rather than the childcare operators that provide the 'safer' investment.
They’re triple net leases, meaning that the tenant agrees to pay the property expenses such as real estate taxes, building insurance, and maintenance in addition to rent and utilities.
Examples of these types of listed REITs are Charter Hall Social Infrastructure
(ASX:CQE) and Arena REIT
(ASX:ARF).
With a particular focus on childcare education, Charter Hall Social Infrastructure is Australia’s largest owner of early learning centres, actively partnering with 37 childcare operators to provide an integrated service offering.
Charter Hall Social Infrastructure’s share price is currently trading at a 33% discount to their NTA per unit, whilst their dividend yield is 5.75%.
Arena REIT has a massive exposure to childcare. Their portfolio consists of 271 social infrastructure properties, of which 246 are early learning centres.
The portfolio weighted average passing yield is 5.05% and the NTA per unit is $3.42.
When assessing seniors living, which is not to be confused with aged care, which has a much more onerous set of regulations and is for people that require help with personal care or nursing care, seeks to capitalise on the growing ageing population within the country.
On 30 June 2020, approximately 4.2 million people (16% of Australia’s total population) were aged 65 and over. By 2050, around one quarter of all Australians will be aged 65 years and over, with the proportion of younger Australians declining. In fact, the number of people aged 65 years and over will overtake the number of children aged 0 to 14 years by around 2025.
Listed REITs that have a heavy exposure to this sub sector include Lifestyle Communities
(ASX:LIC) and Eureka Group Holdings
(ASX:EGH).
Lifestyle Communities’ mission centred around owning the land that working, semi-retired and retired people can lease.
The Company’s NTA per unit is $453.68 cents and they pay a dividend of $5.5 cents per unit.
Eureka Group Holdings focuses on providing affordable rental accommodation for independent seniors within a comfortable community environment. Eureka owns 30 villages, 5 of which are owned in a joint venture and an additional 14 villages under management.
Eureka’s NTA per unit is $41.5 cents, representing a 5.85% discount to the share price. The Company’s dividend $0.67 cps.
Another area of focus that has potential upside within the current economic climate is rural assets, "given that Australia is the food bowl of Asia," Mr. Sammut added.
Rural Funds Group
(ASX:RFF) is the one that stands out the most.
In their half-year report, the NTA per unit was $2.08, representing a 5.05% discount to the current share price.
The Company owns, develops and operates Australian farmland and agricultural infrastructure, in which they manage approximately $2.0 billion of agricultural assets on behalf of retail and institutional investors.
Now shifting to the "Don’ts" of the Australian property sector, it is hard to go past commercial office buildings in this current climate.
The issue with office spaces is twofold.
Firstly, there are increased costs to fund loans due to rising rates.
Secondly, the rise of remote work has reduced the number of people physically present in offices.
As a result, there is a decline in demand for office space, putting pressure on office REITs to generate higher revenue from increased rentals, which is not occurring.
This situation is challenging for office REITs as their success relies on securing more income from office space rentals, but the work-from-home trend is hindering this growth.
Some of the bigger REITs by market cap have a significant exposure to this sector.
This includes Dexus
(ASX:DXS), Charter Hall
(ASX:CHC), and Centuria Office REIT
(ASX:COF).
About a month ago, Dexus downgraded the value of its diversified office portfolio by $1 billion.
Dexus was a rare landlord that opted to sell one of its 26-storey office towers in the Sydney CBD for a significant loss.
Their NTA per security is $12.01, and they are currently trading at $8.18.
Charter Hall has recently imposed a restriction on redemptions in the Charter Hall Direct PFA Fund, due to the fact that they are facing difficulty in selling its buildings at fair prices, weakness in the office sector due to increased demand for working-from-home and flexible workplace practices.
The Company’s recent office valuation has dipped by almost 4%.
Their NTA per security is $6.53, and their current share price is $11.10.
Centuria Office REIT is Australia’s largest pure-play office A-REIT and is included in the S&P/ASX300 Index.
The Company has an NTA of $2.40 per unit, and the share price is currently trading at $1.47. The Company has a distribution yield of 8.8%.
Another avenue for investment during high inflationary periods is non-discretionary sectors.
Discretionary spending has been under pressure and is likely to continue given cost-of-living issues.
As a result, people are leaning towards spending more on essentials, like food, rather than non-essentials.
In the retail sector, focus remains on areas where purchases are necessary, such as supermarkets and petrol stations.
REITs that fall within this sector include Charter Hall Retail REIT
(ASX:CQR), Region Re
(ASX:RGN), and RAM Essential Services Property Fund
(ASX:REP), which also has exposure to healthcare.
And on the other hand, the current climate puts pressure on discretionary sectors to perform.
Scentre Group
(ASX:SCG) and Vicinity Centres
(ASX:VCX) have a heavy exposure to this sub-sector.
