ASX REITs (real estate investment trust) are companies that own and operate property assets that typically produce income.
Some REITs focus on commercial real estate like offices, hospitals, shopping centres, warehouses etc.
Others specialise in residential property investment.
Adding these holdings to your portfolio can be a great strategy to get exposure to Australia's real estate market. This could be particularly appealing to investors that don't have the capital to invest in physical real estate, but still want the upside of this sector.
Fundamentals are building
Over the weekend, broker Bell Potter released a report analysing the ASX REIT market.
In the report, Bell Potter said fundamentals continue to improve in Australia's retail real estate market as new supply fails to keep up with growing appetite for space.
Population growth remains robust, and retail turnover is growing, up +1.2% in June (vs. expectations for +0.4%). As per our CoTW, vacancy is now just 4.9% nationally after 6 consecutive periods of decreases (or flat movement).
Development still doesn't stack up, with new supply in Q2 falling -53% short of the 10yr average.
The broker said experts noted the opportunity lies within strategic buying (calling out NSW & VIC) in high growth catchments and uplift opportunities through remixing.
Which ASX REITs are set to benefit?
Based on the brokers analysis, there are three ASX REITs with significant upside – all receiving a "buy" recommendation.
The first is Region Group (ASX: RGN). Region Group specialises in leasing out convenience-focused properties that offer everyday goods and services.
We continue to remain positive on RGN (Buy; TP: $2.65) which is the largest landlord of neighbourhood-based shopping centres in Australia, with strong exposure to the east coast and ample opportunity to push rents.
Based on its current share price of $2.35, the broker expects approximately 12.8% upside.
The ASX REIT with the highest upside according to Bell Potter is HMC Capital Ltd (ASX: HMC).
HMC currently has more than $7.5 billion of assets under management (AUM) across real estate and private equity strategies.
Bell Potter has a $8.15 price target, which indicates an upside of 124.5% from its current share price of $3.63.
Thirdly, Bell Potter has tipped upside for Goodman Group (ASX: GMG).
It specialises in industrial and commercial properties, owning, developing, and managing a global portfolio worth around $80 billion.
The broker has a price target of $39.35, which indicates an upside of approximately 11%.
