One of the stronger retail sectors includes supermarket anchored neighbourhood centres. Photo: Pexels / Oleg Magni
  • Arean REIT, HomeCo and Charter Hall are among those recording high valuations in the past six months, despite economic disruptions
  • Childcare, Healthcare and non-discretionary retail benefitting the most due to their certainty
  • The office sector looking vulnerable, noted Amy Pham

Unsurprisingly, higher interest rates are having a different reaction to the A-REIT property sectors.

However, alternative real estate sectors are currently standing out.

Valuation increases have been seen across the board. June 2022 preliminary data has shown strong increases compared to December 2021 – Arena REIT is up by 7.8%, HomeCo Wellness REIT up by 4.1% and a 4.6% increase for HomeCo Daily Needs REIT.

Charter Hall has also recorded strong valuation growth.

Certainty equals increased valuation

A command dominator in these sectors is that those showing increased valuations have a greater earnings certainty, such as childcare, healthcare and non-discretionary retail assets.

These continue to report cap rate compressions thanks to strong 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,” said Amy Pham, portfolio manager for the Pengana High Conviction Property Securities Fund.

“Their certainty of income is based on demand, which is driven by secular trends and long term stable tenancies.”

“In other sectors, cap rate spreads to real yields are elevated for retail, on par for office and below average for industrial.”

Amy Pham headshot
Amy Pham, Fund Manager at Pengana Capital. Image supplied.

Ms Pham noted the office sector is looking more vulnerable in comparison to the 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,” she said.

“The flight to quality has also seen an increase in capex for older assets dragging on operating income in the near term.”

Although the industrial sector appears to have the most downside risk, at least on the surface, Ms Pham said it doesn’t take into account some ongoing tailwinds.

“Industrial has a positive outlook for rental growth based on continued demand and limited supply,” she said.

“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.”

Ms Pham referred to the fund she manages – which is the only high conviction AREIT fund with an ESG focus.

“(We believe) 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.”

She added that responsible investing is crucial to generating 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,” she explained.

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