Why this expert sees an opportunity for ASX property shares in 2022

While inflation fears are building this fund manager offers one sector as a possible outperformer…

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Key points

  • A high inflation print has weakened investor sentiment towards unprofitable shares
  • An expert makes the case for why ASX property shares (AREITs) could be a good investment in 2022
  • Several AREITs outperformed the benchmark index last year

It has been a disappointing start to the year for the S&P/ASX 200 Index (ASX: XJO), being down 2.4% year-to-date. Concerns of persistent inflation have applied the brakes on many high-growth names. Instead, investors are turning towards cash generative businesses — some of which could be property shares on the ASX.

Pengana Capital Group fund manager, Amy Pham recently explained why this year could be another good one for Australian real estate investment trusts (AREITs). Despite the sector delivering a phenomenal year for shareholders last year, Pham thinks there are still reasons to back it again in 2022.

Making the case for ASX property shares

Although AREITs may not be as exciting as some of the other companies on the ASX, there could be a case to be made for the sector. However, it is worth knowing that the property sector covers a broad spectrum. This includes real estate across retail, logistics, offices, etc.

According to Pham, the macroeconomic environment for ASX property shares appear to be strong. For instance, REITs are holding healthy balance sheets (on average) and household savings are floating around all-time highs. These factors suggest there could be more room for these investments to run in 2022.

Though, there are risks present for investors to be mindful of. Currently, the Omicron variant is running rampant, which could create further supply chain issues. As central banks have been preaching, these supply-side disruptions are feeding into higher inflation.

On the topic of inflation and its potential effect on REITs, Pham says:

We are of the view that inflation is transitory and will subside as the pandemic is contained. With wage growth only approaching the 3% watermark, we don’t expect inflation to be at the high levels seen in the 1970s and early 1980s. To put things into perspective, interest rates are looking to rise but from a very low base.

Additionally, the fund manager believes ASX property shares can continue to deliver a sustainable income yield of 4%.

For Pham, the opportunities lie in REITs with positive free cash flow, good cash reserves, and solid management. Furthermore, the sector looks set for increased merger and acquisition activity in the eyes of Pham in 2022.

How it played out last year

If the property sector can deliver this year it would be a back-to-back winner. Last year, the sector outperformed the benchmark index. This was thanks to some impressive showings from a few ASX property shares.

TradingView Chart

As detailed in the chart above, National Storage REIT (ASX: NSR) and Goodman Group (ASX: GMG) provided substantial returns to their shareholders. Not too far behind was Centuria Capital Group (ASX: CNI) with a 34.6% gain in 2021.

Finally, REITs more exposed to the retail sector performed to a lesser extent. For example, Scentre Group (ASX: SCG) dished up a 16.9% return last year. However, this was still an outperformance of the broader market.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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