Investing in listed property can look tricky when bond yields are higher and recession fears abound. But it’s a good time to be an active stock-picker, argues JULIA FORREST

• Assets need pricing power and inflation protection
• Supermarket based retail, self storage and logistics the best
• Find out about Pendal Property Securities Fund

INVESTING in listed property when bond yields are higher – and amid talk of a recession — is tailor-made for active stock pickers, says Pendal’s Julia Forrest.

As bond yields increase, the yield on Real Estate Investment Trusts may appear less attractive by comparison. Higher bond yields also indicate higher rates, which can mean higher finance costs for real-estate developers.

But there are opportunities out there for REITs investors who know where to look.

“You want a portfolio with inflation protection, and you want to own assets that have pricing power,” says Forrest, who has co-managed Pendal’s property trust portfolios for more than a decade.

“We’ve positioned our portfolio so we are over-weight in supermarket-based, shopping centre REITS, because the big supermarkets have reasonable pricing power and demand is fairly resilient.

“We also like mall REITS.

“We have self-storage property in the portfolio which works quite well in this environment.

“They have pricing power. About 40 per cent of tenants are business tenants and they get to sign leases on a monthly basis as opposed to locking themselves in for three to five years.

“That means there is protection against inflation.

“We are also overweight logistics and industrial REITS.

“The landlords have pricing power because the vacancy rate is so incredibly low. They’re ability to charge market rents means you have reasonable earnings growth and protection against inflation.”

Forrest says inflation isn’t going away anytime soon.

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“We’re of the mindset that inflation will probably be stickier. We are not going back to this incredibly low inflationary environment,” she says.

Keep an eye on leasing spreads

A metric commonly used by REIT investors is “leasing spreads”. It’s the difference between what a landlord charges on an expiring lease, and what they get on a new lease for the same asset.

During the recent ASX reporting season, industrial REITs were commonly getting leasing spreads of between 15 per cent and 20 per cent.

“The industrial REITs have the widest positive leasing spreads,” Forrest says.

“Over the past five years, retail REITS have had negative leasing spreads as a result of depressed sales. Supermarket based REITS did not go negative, though they were close to flat.

“Mall REIT leasing spreads are no longer negative and as such no longer an earnings headwind.”

The retail REITS have changed tack in recent years, focusing more on services, which are harder to replicate online, and encouraging food and beverage outlets to encourage people to stay longer.

It’s a very positive active leasing strategy for those assets, Forest says.

“We are looking for asset classes that continue to have direct property tailwinds, like industrial, and have pricing power and inflation protection.”

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About Julia Forrest, Pete Davidson and Pendal Property Securities Fund

Julia Forrest has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.

Pete Davidson is Pendal’s Head of Listed Property. Over the past 34 years Pete has held financial markets roles spanning portfolio management, advisory and treasury markets. he specialises in the property, retail, insurance and infrastructure sectors.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here