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The View from the Outer

View from the outer: Time to get real

Tim Rocks
3rd September 2020

Time to get real

We recommend investors establish an overweight position in the domestic property sector. While there is the potential for near term volatility given the large number of unresolved macro risks, we see the potential for a combination of strong medium-term capital gains and income generation from the sector given some of the following factors:

 

  • Valuation support. Many REITs are priced for significant falls in property values, particularly the malls. This appears unlikely given the typically prime location of these assets.
  • Dividend attraction. Many sectors are facing much larger dividend cuts than is likely from the REITs. At current prices, REITs are forecast to yield in excess of 8% in the next 2-3 years.
  • A safer way to gain exposure to economic recovery. We see the property sector as a better way to play the economic recovery than some of the alternatives including banks, airlines and travel stocks.
  • Real assets protect against inflation. Property and infrastructure assets have traditionally proven to be effective inflation hedges and may be bid up by investors as inflation expectations continue to rise.

Recommendation

We recommend investors begin establishing positions in select large-cap REITs directly (particularly SCG, GPT, SGP, MGR and DXS) or via a broad market exposure such as an ETF. The specialty REITs with long weighted average lease expiries (WALE) such as petrol stations (WPR), childcare centres (ARF) and hotels and pubs (HPI) look attractive at current prices while carrying lower levels of macroeconomic risk.

 

We recommend investors fund this trade from cash or by further reducing exposure to traditional Australian equities where we see risks intensifying in coming months from peaking stimulus and elevated vaccine optimism. Sectors to consider lightening to fund this trade include banks (particularly CBA), consumer discretionary names that have been direct beneficiaries of stimulus measures and ‘expensive defensives’ such as consumer staples, telecommunications and select utilities.