Chart of the Week: Recent selloffs in this ASX sector opens doors to opportunity
Ongoing rate hikes have investors spooked.
The week’s insights come from equity research analysts Yingqi Tan and Alex Anderson in the latest Industry Pulse for Australian REITs.
Real Estate Tanks Amid Rate Jitters
Investor sentiment has soured in anticipation of re-accelerating inflation and higher interest rates. The real estate sector has suffered as a result. This sees many undervalued opportunities with our sector coverage.
The selloff sees opportunities aplenty. Office REITs, on average, trade at the steepest discount to our fair value estimates, with investors bracing for another potential round of aggressive downward revaluations. The sentiment toward residential developers also cooled considerably.
Higher rates could dampen home buyers’ enthusiasm and soften home sales. Construction material inflation, fueled by the Iran war, also poses a threat to real estate developers’ profit margins.
Not All Offices Are Equal
In general, central business districts outperform fringe locations, with lower vacancies and higher rent growth. High-grade, well-located buildings are likely to remain sought after, especially in markets with strong jobs growth and limited new supply.
Investors are pricing in further downside to office property values as interest rates rise. But quality matters, and Dexus stands out with a high-quality portfolio. We think the discount relative to other high-quality office REITs, such as GPT, is attractive.
