Real Estate Investment Trusts (“REITs”) had a rough 2022. The overall sector fell over 20% and far outpaced the drop of less than 2% for the overall ASX 300 index.

But beaten down sectors often present opportunities for investors with a long-term orientation who are willing to look past temporary headwinds.

For investors wanting to know more about investing in listed property we did a deep dive into the sector our latest episode of Investing Compass, which you can listen to below.

In this episode, we provide an overview of the asset class and explore two opportunities for investors.

Learn more about REITs here. 

The role REITs can play in a portfolio

Beaten down sectors often present opportunities for investors with a long-term orientation who are willing to look past temporary headwinds.

There are several reasons why REITs can play an important part of investor portfolios.
Morningstar’s strategic asset allocation for aggressive investors calls for an 8% allocation to listed property. REITs can offer high levels of income and diversification due to a low correlation with shares.

Australia is the second largest REIT market behind the United States. However, the sector is relatively concentrated with just 47 holdings listed on the ASX.

The S&P/ASX 300 A-REIT index contains just 31 constituents with over 80% of the index made up of the top 10 holdings.

Given the nature of the local market our analysts believe it is very difficult for active managers to outperform the index and instead consider a passive approach a good option to get exposure to the sector.

There are several considerations for investors who are searching for opportunities in individual shares in the sector. REITs can hold a wide variety of property types and each has different characteristics and can be in different phases of the real estate cycle. Depending upon the individual REIT you may be exposed to office, industrial, residential, retail or healthcare properties.

As any real estate investor is aware the prospects for property is often all about location, location, location. Investors should consider the geographic location of the underlying property holdings and how that might influence price appreciation, occupancy and rental income.

Debt and real estate go hand in hand. High levels of gearing can be a risk in challenging operating environments as assets may have to be sold off at inopportune times to pay back debt.

Despite the fall in prices our analysts are not overly enamoured with the sector. In the past year the price to fair value of our REIT coverage universe has fallen from 1.06 to .92.
That represents a drop from being 6% overvalued to 8% undervalued.

2 REITs worth a look


In the podcast we discuss two REITs investors could consider.

Vanguard Australian Property ETF (ASX: VAP)


The first is our top pick for passive exposure to the local REIT market which is the Vanguard Australian Property ETF which earns a Gold medallist rating from our analysts.

Like most Vanguard ETFs, VAP comes in at an ultra low fee of 0.23%.

BWP Trust (ASX: BWP)


BWP Trust owns warehouse properties and is the primary landlord for home improvement chain Bunnings.

Although it is trading at an 8% premium to our fair value of $3.60 we do like BWP’s relatively low levels of debt, the strength of Bunnings as the primary tenant and a strong dividend yield of 4.7%.

Due to the quality of the business we have awarded BWP with a Narrow Economic Moat rating.