I love finding cheap, undervalued S&P/ASX 200 Index (ASX: XJO) shares. However, that's a tricky challenge, as multiple sectors are seeing strong performance.
ASX bank shares like Westpac Banking Corp (ASX: WBC) and ASX technology shares such as WiseTech Global Ltd (ASX: WTC) have soared in the past year – WiseTech is up 102% and Westpac is up 56%.
So, where are the bargains? I think there are still opportunities; we just need to be selective and brave.
In my eyes, one of the sectors that looks attractive is the real estate investment trust (REIT) space. Elevated interest rates are certainly a headwind for REITs because they usually have a lot of debt on the balance sheet. But I think the lower valuation more than makes up for it. At some point, interest rates in Australia could reduce to help REIT valuations and lower financing costs.
I like the two ASX shares below right now.
Centuria Industrial REIT (ASX: CIP)
I'm calling this ASX 200 share cheap for several reasons. It owns a portfolio of quality industrial properties, mainly in Australia's large cities.
Firstly, it's trading at a large discount to its stated net asset value (NAV). This figure takes into account the (independent) valuation of the properties, the debt and all other assets and liabilities.
At 30 June 2024, it had a NAV per unit of $3.87, and the Centuria Industrial REIT share price is trading at a 22% discount to this.
Each investor may have a different view about how much the properties are worth. But, the rental profit and distribution returns can help support confidence in the valuation.
In FY25, the business is expecting to pay a distribution of 16.3 cents per unit, which translates into a distribution yield of 5.4%. It's expecting to generate net rental profit, called funds from operations (FFO), per unit of 17.5 cents. If it paid a 100% distribution payout ratio, the distribution yield would be 5.8%.
Its rental income is growing rapidly – in the first quarter of FY25, it achieved re-leasing spreads of 54%, meaning the new rental contracts are making 54% more rental income than the old contract. The ASX 200 share is benefiting from tailwinds like an increasing amount of online shopping, the onshoring of supply chains and Australia's growing population.
Centuria Capital Group (ASX: CNI)
This business is a property fund manager and is the manager of the Centuria Industrial REIT.
It earns significant management fees from the various property funds it manages, so any interest rate cuts could benefit the business significantly if property valuations rise or client inflows increase. Two of the biggest assets on the Centuria balance sheet are the holdings of Centuria Industrial REIT and Centuria Office REIT (ASX: COF).
It has its own NAV value of $1.79, though a sizeable portion of this is intangible assets.
I think the cheap ASX 200 share's guidance for FY25 is appealing. It's expecting to make 12 cents of earnings per security (EPS) and pay a distribution of 10.4 cents per security. That means at the current Centuria share price, it's valued at 15x FY25's estimated earnings with a potential distribution yield of 5.8%.
