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Cheap as REITS: The valuation opportunity in global listed property

Share market sell offs following the major shift in monetary policy last year created opportunities for bargain-hunters in global listed real estate.

Select global real estate investment trusts (GREITs) are as cheap as they have been in some time compared to their private market valuations, as measured by the listed segment’s discount to net asset values.

Attractive Valuation

Discount to net asset value (attractive valuation)
The fund was recently trading at -21.3% discount to NAV

Metrics are for the First Sentier Wholesale Global Property Securities Fund. Source: First Sentier Investors.
NAV (Net Asset Value) is our assessed value of property assets owned plus the value of other businesses operated.
Past performance is not indicative of future performance. Data as at 30 November 2022.

The share market sell off last year and corresponding discounted valuations comes at a time when the fundamentals in the segment are relatively strong compared to other periods.

We look to a series of measures to assess fundamentals, including: strength of balance sheets, underlying occupancy rates, resilience of cash flows, expected dividend growth, among other attributes.

REITs within our portfolios have an average duration of debt financing locked in for the next 6.4 years with minimal (2.7%) refinancing risk this year and next, high occupancy rates (94.1%), a weighted average lease expiry of 3.7 years underpinning strong cashflows and forecast yield growth of 7.3% compound annual growth rate over the next three years.

The operating fundamentals are strong at a time when there are large discounts between private market valuations and listed GREITs.

Slowdown ready

Picking companies in industries well positioned to grow as recessions loom will be paramount for investors, as most countries expect to experience an economic slowdown in 2023.

When we are looking at taking advantage of valuation opportunities in GREITs, we are focusing on assets with low economic sensitivity – ones with resilient cash flows and inflationary-hedge characteristics as well as relatively strong balance sheets.

If economic slowdowns begin to bite, certain sectors and industries will hold up better than others.

Student accommodation, data centres, convenience retailers, land-lease communities as well as REITs within the healthcare sector, including independent living and skilled nursing facilities – these are all areas likely to have resilient cashflows if things get tough and spending is reigned in.

We believe the recent share market selloffs have created some attractive opportunities in listed real estate for investors focused on strong fundamentals in sectors with low economic sensitivity.

Important information

This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (FSI AIM), which forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (MUFG), a global financial group. A copy of the Financial Services Guide for FSI AIM is available from First Sentier Investors on its website.

This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation.

The product disclosure statement (PDS) or Information Memorandum (IM) for the First Sentier Wholesale Global Property Securities Fund ARSN 108 688 777 (Fund), issued by  Colonial First State Investments Limited (ABN 98 002 348 352, AFSL 232468) (CFSIL), should be considered before deciding whether to acquire or hold units in the Fund. The PDS or IM are available from First Sentier Investors. The target market determination (TMD) for the Fund is available from First Sentier Investors on its website and should be considered by prospective investors before any investment decision to ensure that investors form part of the target market.

MUFG, FSI AIM, their respective affiliates and any service provider to the Fund do not guarantee the performance of the Fund or the repayment of capital by the Fund. Investments in the Fund are not deposits or other liabilities of MUFG, FSI AIM, their respective affiliates or any service providers to the Fund and investment-type products are subject to investment risk including loss of income and capital invested.

Any opinions expressed in this material are the opinions of the individual author at the time of publication only and are subject to change without notice. Such opinions: (i) are not a recommendation to hold, purchase or sell a particular financial product; (ii) may not include all of the information needed to make an investment decision in relation to such a financial product; and (iii) may substantially differ from other individual authors within First Sentier Investors.

To the extent permitted by law, no liability is accepted by MUFG, FSI AIM nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that FSI AIM believes to be accurate and reliable, however neither MUFG, FSI AIM nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of FSI AIM.

Any performance information has been calculated using exit prices after taking into account all ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.

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