It was a mixed year for ASX Real Estate Investment Trusts (REITs) in FY24, with some names missing the board, but others like Goodman Group (ASX: GMG) and Scentre Group (ASX: SCG) showing considerable strength.
According to my colleague Mitch, the outlook for ASX REITs is backed by a strong residential property market. And according to Macquarie, the picture could be even brighter than we think.
Analysts at the investment bank issued a recommendation for investors to consider overweight positions in ASX REITs this week.
This comes as part of a strategic shift in response to anticipated changes in the economic cycle and potential interest rate cuts. Let's take a look at what this means.
Macquarie bullish on ASX REITs
Macquarie says ASX REITs could be at a crucial inflection point in the market cycle, noting that global asset managers are also bullish on the sector.
"This is a key inflection point in the market cycle", the broker said, according to The Australian Financial Review.
In the past when sentiment was already very bullish, forward returns were weak and led by defensives. When the cycle shifts to a slowdown, the odds of defensives outperforming likewise start to rise.
According to Macquarie, this phase typically yields positive but lower returns for stocks. This could warrant a move towards more defensive investments like healthcare and real estate.
Despite concerns over potential rate hikes from the Reserve Bank of Australia (RBA), global trends suggest that major central banks – including the US Federal Reserve – might soon cut rates.
This outlook supports a particularly favourable environment for ASX REITs, the broker says. Due to their attractive yields, these assets tend to perform well when interest rates decline.
Overweight recommendation on ASX REITs
In light of these insights, Macquarie has upgraded its position on the ASX real estate sector. It recommends investors to be 'overweight' with exposure to the domain.
The recommendation is based on the RBA's potential moves. But, it says the potential for a stronger Australian dollar could also mitigate the need for additional rate hikes by the RBA.
We expected a hawkish shift from the RBA, and it has happened. With the shift to slowdown and global banks easing, there is reason to think the RBA will hold so as not to risk pushing the [AUD] up too far.
Macquarie's shift towards REITs is part of a broader strategic adjustment. The bank is reducing exposure to sectors more vulnerable to economic downturns, such as banking and mining.
It has increased its exposure to defensive healthcare stocks like ResMed Ltd (ASX: RMD) and CSL Ltd (ASX: CSL) instead.
Foolish takeaway
Macquarie's recommendation to overweight ASX REITs is driven by its insights into the shifting economic cycle and potential interest rate cuts.
The performance of REITs like Goodman Group and Scentre Group set the bedrock for FY25. As always, it's imperative to conduct your own due diligence.
