A-REITs still offer compelling opportunities for patient investors

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Australian real estate investment trusts (A-REITs) and listed infrastructure continue to present compelling opportunities for patient investors, but diversification is key, says Resolution Capital real assets portfolio manager Jan deVos.

“COVID-19 has accelerated the shift to digital, which has benefited a number of real asset companies, though adversely impacted others,” deVos said. 

“However, we believe most real asset companies have robust, tangible asset backed income and these companies have actually become more valuable recently, as interest rates across the world have fallen.

“If we look at the A-REIT sector alone, just eight stocks make up almost 80% of the A-REIT index and  there is far too much exposure to retail. 

“We are seeing a seismic shift in the fundamentals of retail property as COVID-19 has accelerated the pre-existing trend from bricks and mortar to online.”

Looking at REITs globally, the portfolio manager said investors could find opportunities in property sectors such as life sciences spaces, residential for rent and data communication towers and healthcare.

However, there remains limited exposure to these alternative property sectors when it comes to A-REITs.

“This is why investors must look to a combined portfolio of carefully selected A-REITs and Australian Listed Infrastructure to gain exposure to the undeniable growth and urbanisation trend,” deVos said.

The A-REIT sectors with strong outlooks are logistics, childcare and hotels, while utilities and pipelines are Australian listed Infrastructure sectors with very predictable earnings outlooks.

“The recent market turmoil has highlighted the defensive attributes of utilities and pipelines. Companies such as AusNet, Spark Infrastructure and pipeline owner APA, have been a bedrock of stability,” the portfolio manager said. 

“When it comes to airports and toll roads, we expect the recovery to be quicker for toll road companies such as Atlas Arteria.”

Resolution Capital took advantage of recent weakness in the Atlas Arteria Group share price to increase its holdings, while Transurban’s ability to increase tolls at above inflation levels remains attractive for investors.

On ASX-listed airports, DeVos said they expected it to take until at least 2023 until international passenger numbers returned to 2019 levels.

The portfolio manager said airport operators with superior balance sheets, such as Auckland International Airport, were expected to recover in greater shape.

“Predictable cash flows, strong capital structures and experienced management teams should be key for investors when selecting listed real asset investments,” deVos said.