Intuitively a recession should dampen demand for real estate.
But Pengana Capital Group Ltd (ASX: PCG) reported REITs gained 8% during the August reporting season, outperforming the 2.8% returned by the rest of the market. The sector has been flat this month.
Pengana fund manager Amy Pham told The Motley Fool real estate funds had held firm because of two reasons.
“Things were not as bad as originally expected with rental collection for office and industrial assets remaining high – on average more than 95%,” she said.
“Retail was below 50% but headline collection rate showed an improvement in July as economies started to reopen.”
The second reason was the perceived value during August.
“A-REIT sector showed value with the spread to 10-year bond of more than 400 basis points compared to long term average of 200 basis points.”
Uncertainty in real estate
Pham admitted the REIT reporting season was difficult to interpret because of the uncertainty in quantifying the impact of:
- Treatment of rental rebates on cash flow
- Structural shifts in e-commerce
- COVID implications for the retail sector
- Working from home on commercial real estate
Many REITs withdrew guidance during August.
“The structural shift of online retailing on discretionary malls is now well understood and are reflected in the share price. The structural shift from WFH on the office sector is less clear,” Pham told The Motley Fool.
“We expect that there will be greater pressure on the CBD assets where valuations are more at risk as tenants look for better value space or decentralise their workforce.”
‘Alternative’ real estate is hot
Pham runs the Pengana High Conviction Property Securities Fund.
Pengana reported that the portfolio now significantly included “alternative real estate”.
“We currently hold more than 40% of the portfolio in childcare, seniors living, data centers, and affordable housing such as manufactured home estates.
“We believe these sectors provide both sustainable earnings growth driven by secular trends and diversification outside the traditional core sectors of retail, office and industrial.”
Pengana Capital Group was founded in 2003 and now actively manages more than $3 billion in various funds. The company listed on the ASX after a 2017 merger with Hunter Hall International.
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