Even before interest rates rose 125 basis points over the last couple of months, the fear of rate hikes had already infected many sectors.
Perhaps one sector that is the most directly impacted is real estate.
Interest rate rises increase mortgage repayments, which dampen demand and property prices.
Now one of the hottest real estate markets in the world, Sydney, is set for a 20% fall in house prices.
Not only this, the COVID-19 pandemic has meant commercial real estate has also taken a beating as many workers stick to using their homes as offices.
All this has meant that ASX shares in real estate investment trusts (REITs) have taken a brutal hit in 2022.
In fact, the S&P/ASX 200 A-REIT (ASX: XPJ) has dropped almost 23% since the start of the year.
REITs set for a stunning comeback
Inflation is still running rampant and the US Federal Reserve is set to deliver super-sized rate increases in the coming months.
The Reserve Bank of Australia is sure to follow, in order to fix Australia's own inflation and not devalue the local dollar excessively against the greenback.
Despite this prospect, Wilsons head of investment strategy David Cassidy feels real estate shares could turn it around soon.
"We tend to believe the REIT sector's underperformance should be coming to an end given that bond yields have started to stabilise, market focus will shift to the defensive aspects of REITs, [and] valuations are generally supportive."
He said in a Wilsons memo that high inflation could ironically benefit landlords, if rents rise faster than financing and labour costs.
"This would result in greater top-line revenue, which may in turn be reflected in higher cash flows."
Cassidy warned, though, that REITs with genuine pricing power are the ones providing space in "in-demand, fast-growing sectors, such as distribution warehouses, data centres, and life science facilities".
"These specialty sectors will likely exhibit the most significant pricing power, which will still give them an attractive growth profile relative to traditional sectors like office and retail," he said.
"We believe the logistics sector offers the best prospects for rental growth, consistent with consensus expectations."
Two ASX shares with excellent long-term prospects
Cassidy named Goodman Group (ASX: GMG) and Healthco Healthcare and Wellness REIT (ASX: HCW) as ASX shares his team is focused on.
Warehouse and fulfilment centre provider Goodman is banking on the long-term transition to the digital economy.
"Continued growth in e-commerce drives strong demand for modern, well-located, urban infill logistics sites," said Cassidy.
"Supply of such sites is relatively scarce and barriers to entry are high."
A 30% cooling of the Goodman share price year-to-date has made it more appetising for buyers too.
"In our view, Goodman's valuation is currently attractive with the group trading at a forward price-to-earnings multiple of ~20.6x, which is favourable in the context of management's guided +23% EPS growth for FY22 and a mid-double-digit EPS growth expected over the medium-term."
The Healthco REIT is a landlord for sites like private hospitals, gyms, childcare centres, aged-care facilities, and life sciences research facilities.
Those clients generally sign long leases — on average 10 years — and pay for their own ongoing property expenses.
Cassidy likes this tenant profile through an economic downturn.
"Healthco maintains a defensive earnings profile through the cycle given tenant demand is consistent and non-discretionary in nature, and mostly government-supported."
Healthco shares have lost around 35% so far in 2022, making for a mouth-watering entry point at the moment.
"HCW currently trades at a compelling ~25% discount to its $647 million portfolio valuation and NTA [net tangible assets] per unit of $2.02 as of 30 June 2022, and offers a forward dividend yield of 5.6%."
