Why I nearly invested in this ASX 200 share (and might still)

I was very close to buying this stock last week.

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I've been on the hunt for S&P/ASX 200 Index (ASX: XJO) shares that could make for good investments amid all the recent volatility.

Lower share prices can mean better value, although it pays to remember the share price fall of some companies may be warranted for other reasons.

In the current climate, I am looking for companies demonstrating good underlying operational growth during this period, indicating their sell-offs may be overdone.

Which ASX 200 share did I nearly buy?

I was very close to investing in Centuria Industrial REIT (ASX: CIP). It's a real estate investment trust (REIT) focused on industrial properties in Australia, largely in metropolitan areas.

My trigger for potentially buying units in the company was a share price fall of at least 20% from its 2023 high in February. Centuria Industrial REIT is still down around 30% from its all-time high at the end of 2021. At the start of last week, it was down more than 20% from this year's high.

So why didn't I invest? The cash was in transit to my brokerage account but by the time it was ready to be invested, the share price had climbed above the 20% decline line that I had decided on.  

Why I like Centuria Industrial REIT

The REIT sector is a tricky place at the moment, with potential pitfalls due to interest rate hikes the RBA has overseen.

It's understandable why share prices in the sector have fallen. Not only are higher interest rates meant to push down asset valuations, they can also translate into a higher cost of debt in the coming years.

But at the same time, the ASX 200 share is seeing enormous rental growth. There is significant demand for these types of properties, particularly with more companies onshoring their logistics in the wake of COVID. There is also a very low vacancy rate in major cities for these types of warehouse properties, with limited new supply compared to the demand.

This environment means Centuria Industrial REIT is seeing enormous rental growth for its renewed leases.

In the FY23 second half, its renewed leases saw a 37% increase compared to prior rent. In the FY24 first quarter, renewed leases saw a 48% rental increase compared to the prior rental total.

Rental growth can help support property values, perhaps ensuring that they won't fall too far. In the FY24 first quarter, the company sold two properties at book value for $70 million.

This provides some evidence that its net tangible asset (NTA) value of $3.96 a share, as at June 2023, may be closer to the current market value than some investors were thinking. Centuria Industrial REIT starts the trading week at $2.95 a share.

In FY24, the company is expecting to distribute 16 cents per security, which translates into a distribution yield of 5.4%.

Why I may still invest

A 30% fall from its COVID peak still represents a large decline for the ASX 200 share, and it's possible that more volatility could send the Centuria Industrial REIT share price back down again.

With interest rates potentially going even higher, I think it's a good idea to be picky when it comes to investing in commercial property. I think Centuria Industrial is a great idea for passive income, but I'd also like to buy at a price that gives me a good chance of achieving share price growth.

Motley Fool contributor Tristan Harrison 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 Scott Phillips.

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