ESG factors are already having an impact on Australian REIT valuations, and are set to play an even bigger role in AREIT investing as the sector eyes a potential rebound in 2023, says Pengana’s Amy Pham.  

Pham, who is the Portfolio Manager for the Pengana High Conviction Property Securities Fund, said ESG was becoming more influential in listed and unlisted property as governments and corporates committed to net zero targets. 

“ESG in property is not just a ‘feel good’ thing, it is having a tangible impact on valuations – ESG factors make up 30% of our listed property valuations,” Pham said.  

“For example, environmental factors will become more important with many governments and corporates mandating net zero targets.  

“Some of these targets are ambitious, and will accelerate the focus on sustainability in the built environment over the next few years.” 

The Portfolio Manager said meeting the demand would have its challenges but would create strong investment opportunities. 

ESG factors are influential in managing risk in listed property such as understanding which assets might be a greater risk of fire and floods due to climate change. 

Then there is also risk involved with assets that perform poorly from a sustainability standpoint.  

Pham said assets with a high NABERS rating would outperform over the long-term. 

She said the ‘S’ and ‘G’ in ESG also helped to separate quality AREIT stocks from the rest.  

“Governance and social factors are highly influential in property investment, and important in defining quality and in understanding risk,” Pham said.  

“These factors are strongly correlated with overall AREIT performance. 

“For example, having a board responsible for ESG holds management accountable to deliver on sustainability targets. 

“Also having a more diverse and inclusive culture attracts superior talent and ultimately produce superior outcomes through delivering products that are designed to suit the community in which they operate.” 

Some big name AREIT stocks could be considered oversold during 2022, and have potential to rebound into 2023, Pham said.  

“Some of the bigger property fund managers look like good value, and could benefit as interest rates stabilise given these remain high quality businesses,” she said.  

“There’s still likely to be some uncertainty and volatility in the market, which brings some of the alternative AREIT investments into play.  

“These alternatives are often defensive as they are considered necessities, operating in sectors such as healthcare, childcare, seniors living and defensive retail.” 

Pengana High Conviction Property Securities Fund is a high conviction AREIT fund with an ESG focus.