These beaten-up shares are about to pick up: Moody’s

Which sector is set to see net operating income grow 3% over the next year or so? It’s not what you might expect.

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There is a category of ASX shares that have been pummelled by COVID-19, but have very bright prospects in the next year or so.

That’s according to analysis firm Moody’s Investors Service, which has picked Australian real estate investment trusts (REITs) positioned for a revival in the next 12 to 18 months.

The entire sector saw share prices tumble in late February and March as investors panicked over the potential economic impacts of the coronavirus.

And many nations around the world have indeed gone into recession, which is usually a death knell for real estate.

But Moody’s Investors Service reported on Wednesday that Australian REITs would see their aggregate net operating income grow 2% to 3% over the next year or 18 months. 

This sparks a potential for the share prices to once again pick up.

Exactly which REITs will bask in glory?

Industrial real estate would lead the way in the post-COVID world, said Moody’s senior credit officer Matthew Moore:

A renewed focus on supply chains because of coronavirus disruptions and limited space availability will support demand for industrial assets, benefiting A-REITs active in this space.

ASX-listed REITs that invest in industrial properties include Goodman Group (ASX: GMG) and Charter Hall Group (ASX: CHC).

Will work-from-home kill office real estate?

The white-collar shift to work-from-home arrangements is a risk for the office space subsector.

But prospects still remain solid, according to Moody’s senior analyst Saranga Ranasinghe:

In the office space, performance remains for now supported by low vacancy rates and low near-term lease expiries, but there is a clear longer-term risk in the form of a potential structural shift to remote work that could affect demand.

The Moody’s report listed GPT Group (ASX: GPT), Mirvac Group (ASX: MGR) and DEXUS Property Group (ASX: DXS) as the REITs with the highest exposures to the office market.

It noted all three have “high-quality assets with stronger and larger tenants, staggered lease maturities and leases that mostly have built-in rental escalations”.

What about retail and residential real estate?

The fortunes for retail REITs will vary according to whether the tenants sell discretionary or non-discretionary goods.

Shopping malls with discretionary spending as a focus would see their fortunes improve over the next 12 to 18 months, according to Moody’s– albeit off a very depressed base. REITs in that space include Westfield operator Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX).

Meanwhile REITs such as Charter Hall Group and Shopping Cntrs Austrls Prprty Gp Re Ltd (ASX: SCP), which have more non-discretionary retail exposure, would remain stable.

Residential real estate demand sunk when COVID struck. But government stimulus and relaxed lending rules will fire it up again, according to Moody’s.

The big federal subsidy coming out of COVID is the $25,000 available to all owner-occupiers for renovations. There is also the First Home Loan Deposit Scheme and First Home Super Saver Scheme.

At the state and territory level, first home owner grants of varying amounts and stamp duty discounts help stoke demand.

Unfortunately, apartments were already in oversupply before the pandemic and are in even less demand now with zero immigration. This means the major beneficiary will be the standalone housing market.

“We expect that single family dwellings, particularly outside of major metropolitan areas in Sydney and Melbourne, are best placed to benefit from ongoing stimulus initiatives.”

By September, successful mortgage applications had already picked back up to pre-pandemic levels. That was despite Melbourne still being in the middle of its second lockdown.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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