MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Atchison Consulting investment analyst William Loebis-Arnost on the ASX real estate and infrastructure sectors. 

 

What’s hot right now?

Loebis-Arnost reckons the ASX real estate  (REITs) and infrastructure sectors have opportunities but  investors need to be aware of four key points and myths when choosing stocks.

1.  Asset selection and value adding key to future returns as cap rate compression is largely over following interest rates rises.

“For existing portfolio owners, there’s a limited window to dispose of non-core holdings that no longer provide opportunities to add value to the portfolio,” he said.

“The great landlords and property fund managers know when to lighten their exposure – the greatest even sell out completely.

“The Lowy family exiting the global Westfield mall franchise in 2017 and Sam Zell exiting US REIT Equity Office Properties in 2006 – all seemed to know when the end of a multi-decade run was imminent in their respective property sectors.”

2. Distress and opportunity are two sides of the same coin

Loebis-Arnost said as expectations of a recession increase with rate rises by central banks, speculation of property distress tends to follow.

“If that scenario plays out, it will a decadal opportunity to get positioned for the next cycle,” he said.

He said look for distressed owners of undistressed assets.

“Typically, owners are over geared/overexposed but the underlying asset fundamentals are sound,” he said.

3. Myth – Real estate is an (unqualified) inflation hedge

He said in reality only supply-constrained real estate performs during inflation outbreaks.

“Recall the performance of select Australian residential markets, for example regional residential markets during the pandemic,” he said.

“Oversupplied property are a poor inflation hedge, as investors in PRC residential property over recent years will attest to.”

4. Myth – Logistics/Industrial investment thematic has a long (endless) runway remaining

Loebis-Arnost said that is what was said about retail property sector coming out of early 1990s recession – until the end of household/consumer debt supercycle coincided with the rise in e-commerce in the mid-to late 2010s.

“They said the same of the office sector until the pandemic lockdowns and WFH model was proven to work out of sheer necessity,” he said.

Furthermore, he said the tech sector, including e-commerce,  is laying off employees at speed as capital bails out of the sector as interest rates rise.

“With the likes of Amazon, Shopify and DoorDash retrenching, can the 20%+ per annum rental growth rates assumptions used to justify paying sub-4% cap rates for core logistic assets hold up?” he asked.

“Short term opportunities may still exist, however medium term thematics are likely to begin to challenge.”

 

Top picks

Loebis-Arnost said there are three ASX real estate and infrastructure stocks investors should consider.

TRANSURBAN GROUP (ASX:TCL)

TCL listed on the ASX in 1996 as a double-stapled security, which administers and expands urban toll road networks in Australia and the US.

Melbourne CityLink, the Sydney M2, the Brisbane Gateway, and the Logan highways are some of its main Australian assets.

The company also owns the 495 and I-95 express lanes in US state Virginia. It also manages the motorways in which a consortium of investors has made investments.

“Our bullish thesis on TCL is supported by the fact that Australian toll roads have proven traffic histories and operate in a stable regulatory regime, therefore giving a solid foundation for investors seeking dependable cash flows,” Loebis-Arnost said.

“TCL has a robust network of toll roads that are supported by extended concession terms, on average, 30 years, and a history of obtaining extensions through both requested and unrequested bids for development projects.”

He said TCL is widely regarded as a bond substitute and has a high level of leverage, in which case rising rates are bad for the stock.

“Long-term assets are generally negatively impacted by the current high interest rate environment, but TCL believes that in such environment, CPI toll escalation and their excellent debt hedge profile could result in a net boost to future earnings.”

WAYPOINT REIT (ASX:WPR) 

Loebis-Arnost said with a high-quality portfolio of assets spread across all Australian states and mainland territories, Waypoint REIT is Australia’s largest listed REIT that only owns service station and convenience retail facilities.

“The goal of Waypoint REIT is to maximise the portfolio’s long-term income and capital returns for the benefit of all security holders,” he said.

“The weighted average capitalisation rate for WPR’s portfolio increased by 27 basis points from 5.01% to 5.28% as a result of management’s valuation update in December 2022.”

CENTURIA lNDUSTRIALS REIT (ASX:CIP)

Loebis-Arnost said a “top-notch tenant base” supports CIP’s portfolio of premium industrial properties, which are located in prominent urban areas across Australia.

“Essentially it is a pure play portfolio consisting of premium Australian industrial assets managed by a hands-on, active management,” he said.

“CIP offers investors income and the chance for capital growth.

“During the December 2022 Quarter CIP Delivered a strong quarterly update with 18% positive re-leasing spreads across 10 transactions while re-affirming FY23 guidance of 17 cents per unit.”

 

The TCL, WPR & CIP share price today:

 

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article. 

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