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How to invest defensively in real estate as markets fall

Aerial shot of property

With Australian property continuing to fall from record highs, investors are increasingly seeking more defensive investments and alternatives to bricks and mortar.

Australian real estate investment trusts (AREITs) are one alternative to traditional property investment which Australians are keeping an eye on.

AREITs allow investors the opportunity to invest in real estate stock. Essentially, AREITs are Australian companies that are on the ASX, with the investor holding a portfolio of real estate companies. Just like with every other share, if the prices increase, so does the portfolio, and if the shares in the portfolio decrease, so will the share market.

Is it a good time to get involved?

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According to SG Hiscock & Company’s director and portfolio manager, Grant Berry, the opportunity is in predictability.

“AREITS, or listed real estate, has the attraction of more predictable income streams than many mainstream equities, thanks to lease agreements that include annual fixed increases, CPI inflation increases and, in some cases, inflation plus increases,” said Mr Berry.

“As an investment option, AREITs reflect the real, tangible nature of real estate. If gearing is low there is the appeal of knowing that there are real assets supporting value. As a result, AREITS have been an attractive option for investors who are seeking stable income as well as capital growth,” continued Mr Berry.

Warning to investors

Like all investments, investing in property has some underlying risks associated with it. Currently, the market has some favourable conditions, which in turn are helping to push the prices of shares up.

“Investors should be aware that many AREITs undertake other activities such as development and third-party management, which create additional sources of income, but which may be vulnerable in the late stages of the cycle,” said Mr Berry.

“At the moment, there is considerable pricing dispersion within AREITs and, on our analysis, this is at the widest level since the global financial crisis. Investors therefore need to ensure they fully understand the current risks as well as the opportunities within the sector,” he said.

What is driving current performance

Given that all the companies in an AREIT are linked to property, all factors that affect the value of a property will affect the value of the shares.

With this low interest rates, low capitalisation rates, e-commerce and the flow of capital are all factors that are driving the price of AREIT shares upwards.

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How to invest defensively in real estate as markets fall
Aerial shot of property
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