2 ASX stocks in the sector poised for a massive comeback

Even before interest rates rose by 125 basis points over the past few months, afraid rising interest rates have infected many sectors.

Perhaps one of the sectors most directly affected is real estate.

An increase in interest rates increases mortgage payments, which reduces property demand and prices.

Now one of the hottest real estate markets in the world, Sydney, will see house prices drop by 20%.

Not only that, the COVID-19 pandemic has also hit commercial real estate as many workers continue to use their homes as offices.

All of this means that ASX’s stake in real estate investment trusts (REITs) has taken a brutal hit in 2022.

In fact, S&P/ASX 200 A-REIT (ASX:XPJ) has fallen nearly 23% since the start of the year.

REITs set for a stunning comeback

Inflation is still rampant and the US Federal Reserve is set to deliver a super big interest rate hike in the coming months.

The Reserve Bank of Australia will surely follow suit, to fix Australia’s own inflation and not devalue the local dollar excessively against the greenback.

Despite these prospects, Wilson’s chief investment strategist, David Cassidy, feels real estate stocks could soon turn things around.

“We tend to believe that the poor performance of the REIT sector will end soon as bond yields stabilize, market focus will shift to the defensive aspect of REITs, [and] ratings are generally supportive.”

He said in the Wilsons memo that high inflation could ironically benefit landlords, if rents rose faster than financing and labor costs.

“This will result in greater top-line revenue, which in turn can be reflected in higher cash flow.”

Cassidy cautions, however, that REITs with genuine pricing power are those that provide space in “high-demand and fast-growing sectors, such as distribution warehouses, data centers and life science facilities”.

“These particular sectors will likely show the most significant price strength, which will still give them an attractive growth profile compared to traditional sectors such as office and retail,” he said.

“We believe the logistics sector offers the best prospects for rental growth, consistent with consensus expectations.”

Two ASX stocks with excellent long-term prospects

Cassidy named Goodman Group (ASX:GMG) and Healthco Health and Health REIT (ASX:HCW) as ASX shares its team’s focus.

Warehouse and fulfillment center provider Goodman is making a long-term transition to the digital economy.

“Continued growth in e-commerce is driving strong demand for modern and strategically located urban filler logistics sites,” said Cassidy.

“Supply of such sites is relatively scarce and barriers to entry are high.”

The 30% drop in Goodman’s stock price year-to-date has made it more tempting for buyers as well.

“In our view, Goodman’s valuation is currently attractive with the group trading at a forward price-to-earnings multiple of ~20.6x, which is favorable in the context of management-guided +23% EPS growth for FY22 and mid-double-digit EPS growth expected in the near future. medium-term.”

The Healthco REIT is the owner for sites such as private hospitals, fitness centers, child care centers, elderly care facilities, and life sciences research facilities.

These clients generally sign long-term leases — 10 years on average — and pay their own ongoing property costs.

Cassidy likes this tenant profile through the economic downturn.

“Healthco maintains a defensive earnings profile through the cycle given that tenant demand is consistent and non-discretionary, and is largely supported by the government.”

Healthco shares have lost about 35% so far in 2022, making for a lucrative entry point today.

“HCW is currently trading at an attractive ~25% discount on portfolio valuation and $647 million NTA [net tangible assets] per unit $2.02 as of June 30, 2022, and offers a forward dividend yield of 5.6%.”

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