Property specialist sees opening
Corrado Russo thinks real estate investors overreacted to the prospect of higher interest rates, but the portfolio manager at Timber
creek Asset Management noted massive exchange-traded-fund redemptions are also contributing to what has become a buying opportunity.
“REITs, fixed income and other interest-rate-sensitive sectors generally trade off as an immediate reaction to a rising rate environment,” Russo said. “After that initial sell-off, real estate typically outperforms as rents rise with higher inflation. With higher GDP comes higher demand for space, and that allows landlords to increase rents and cash flow.”
The manager of the Timbercreek Global Real Estate Fund pointed out real estate is one of the biggest beneficiaries of a rising economy and higher inflation.
Russo is addressing the threat of higher interest costs as companies roll over their debt by positioning the portfolio in names with short lease lengths and long debt durations.
The recent correction also provided Russo the opportunity to buy names he has always liked from a quality perspective, but didn’t own because they were too expensive. Large caps such as Westfield
Retail Trust and Unibail-Rodamco SE presented a particularly attrac tive oppor tunity, given their large weighting in real estate indexes and related ETFs.
“The sell-off had nothing to do with fundamentals,” Russo said. “So it was a no-brainer for us to buy some of the best assets with low leverage, high dividend yields and very attractive upside potential in growth and cash flow.” In Canada, the manager bought
Dundee Corp., which he noted has a quality portfolio of office buildings and saw its share price fall in the double digits, and added to existing positions.
His biggest increase in exposure was Australia, and he also reduced his exposure to Japan and South Africa in an effort to de-risk the portfolio.
“Given the pricing and volatility in both stocks and currencies, and the appreciation year to date, the rewards no longer justified the risk,” he said. “We see better opportunities with similar expected returns in places like Australia, Europe and the U.S.”