Speaking on a recent episode of Relative Return, Infinity Asset Management chief investment officer Piers Bolger said the group is underweight real estate investment trusts (REITs) but could soon begin looking to seize undervalued opportunities.
“We expect cap rates to move out further,” Mr Bolger said. “The REIT market has been one of the more volatile markets, certainly relative to a longer track record.
“We are underweight REITs in our portfolios. We take the view that a lot of that pain is yet to pass through the system. We do think there is more pain to come. But in the context of what we have seen over the last 12 to 18 months, it will be less than that, given the fact that we are also of the view that central banks are closer to finishing their rate tightening program,” he said.
“There may be some opportunity to move back into the sector given that valuations have come down markedly.”
Property giant Dexus believes the current volatility in Australian real estate presents an opportunity for managers to seek out quality investments.
“While financial assets can have value stripped away quickly (such as Twitter or Credit Suisse), real assets are physical assets that have an intrinsic worth due to their substance and purpose,” the group noted in its Q2 2023 market outlook report.
“The price of an airport or a hospital may change from year to year, but its underlying value to the community typically remains high, sometimes performing an essential service.”
The report noted that a discount to net tangible assets in the Australian REIT (A-REIT) market has led to questions about the values of the underlying real estate.
“While values are adjusting, history has shown that the listed A-REIT market tends to undersell and oversell compared to the unlisted market because it is more sensitive to both interest rate movements and equity market volatility. Typically, when a wide discount gap closes, it is more due to listed pricing increasing than unlisted pricing easing,” it said.
The S&P/ASX200 A-REIT sector has delivered a 6.5 per cent return so far this year, with much of those gains occurring in April following the RBA’s decision to leave the cash rate on hold.
However, over a five-year period, the index has only delivered an annualised return of 0.8 per cent and 2.6 per cent over 10 years.
Over the last 12 months, A-REITS have fallen by 8 .3 per cent.