As many as 10 stocks in this ASX sector are trading at 15-30% below their intrinsic value

Note: This interview was taped on Monday 21 October 2024.

Investors in the real estate investment trusts (REITs) space have been on an almighty rollercoaster ride over the last few years. After the GFC and before COVID, everything was rosy with low interest rates, lower debt costs, and buoyant investor sentiment dominating most of the narrative. But the onset of COVID, the work-from-home megatrend, and the historic rise in bond yields have led to a massive re-rating in valuations for this space. 

Hindsight told us all that June 2022 was roughly the peak of valuations and the low for capitalisation rates - in other words, when the good times ended. 

But now, nearly two and a half years after the start of this down cycle, it appears there is finally a light at the end of the tunnel. 

"We do think we're approaching the bottom in certain sectors. We think some sectors such as industrial logistics and convenience retail have already hit the bottom in terms of the June 2024 valuations," says Steve Bennett, CEO of the Direct Property division at Charter Hall. 

"It's fair to say that if we haven't hit the bottom, we are very close."

But make no mistake. Not all properties are the same and there are many nuances in the commercial property market itself. For instance, industrial property may rebound faster than office property but this will likely be led by certain sectors within industrial property.  

"We think in the office market, it will be a two-tiered market. The highest-quality, prime-grade assets will come out well. Supply will be quite muted given it takes 8-10 years to build an office in a CBD market," says Bennett.

"In terms of industrial assets, we think they will come out of it quicker than other sectors but even in there, we do think the longer-leased assets, which have been a little bit out of favour given the huge rental growth, will swing back when people value long-term certainty and the quality of those long-term cash flows in those prime assets," he adds. 

The same nuances can be said for listed vs unlisted property and properties in different cities.

This change in sentiment and looming change in fundamentals is also affecting A-REIT stocks. And while Goodman Group (ASX: GMG) may be the star of the bunch, there are overlooked REIT stocks that Bennett says are worthy of a second look. One such firm, Dexus (ASX: DXS), is flagged by Bennett as "having a $40 billion funds management business basically priced at nothing."

Bennett is joining us as part of Livewire's Alternatives in Focus series. In the following interview, he'll talk us through the evolving big picture, where he thinks investors will see recovery come through the fastest, and where the best risk-reward opportunities lie.

Timecodes

• 0:00 - Intro
• 0:42 - Where are we now in the property cycle?
• 1:57 - What are valuations like at the moment?
• 2:59 - What will recovery look like when it comes to different areas of the market?
• 4:28 - Where are you seeing your best risk-reward at the moment?
• 5:51 - Goodman Group (ASX: GMG) are the star performers in the REIT space. Which of the laggards would you back? -- Stocks mentioned: Dexus (ASX: DXS)
• 7:01 - Which REITs will continue to suffer while others recover? -- Stocks mentioned: Cromwell Property Group (ASX: CMW)
• 8:34 - What are the characteristics you look for in a high-quality property asset?
• 10:30 - What are some examples of unlisted property assets you like at the moment?
• 11:47 - How much should an investor allocate toward property investments? 
  
  

Charter Hall is the largest owner of real estate in Australia

Please contact Steve directly for further information, or visit the Charter Hall website.