The commercial property world is a very interesting sector in my opinion. It offers investors solid income and long-term capital growth. We get exposure to this on the ASX via real estate investment trusts (REITs).
There are some areas that might be in danger of oversupply such as office space, according to industry experts. However, there are other areas which could be worth a look.
I think the childcare centre space is an interesting proposition. The number of babies born each year is increasing. During FY16 there were 315,500 babies born. These children will steadily start attending childcare centres as part of their development.
I think Arena REIT No 1 (ASX: ARF) could be an investment choice worth looking at.
Property portfolio
Arena has a property portfolio of 198 childcare properties spread across all the major cities.
It has a wide array of tenants including Goodstart Early Learning, G8 Education Ltd (ASX: GEM) and Affinity.
The portfolio is only going to become more diverse as time goes on and it adds more properties.
Results
Arena regularly achieves rental increases from its tenants, which flows to the bottom line. In FY17, Arena achieved like-for-like rental growth of 4.3%. Between FY14 and FY18 the distribution will have increased by a compound annual growth rate of 9.3%.
Outlook
Management have confidently pencilled in a 6.7% increase to the distribution for FY18. There aren't many REITs growing at this pace on the ASX.
Distribution
The best thing about Arena is its pleasing income yield. It currently has a trailing distribution yield of 5.48%, which is attractive when you add the growth expected over the next year.
A bonus for shareholders
Arena has a stated aim of investing in growing industries.
Childcare is its main source of earnings, but it also owns a handful of buildings that it leases to Primary Health Care Limited (ASX: PRY). Healthcare is a growing sector and it would be a good move by Arena to keep expanding in this industry and other growth areas.
Foolish takeaway
Arena is currently trading at 18x FY17's operating earnings per share.
I think the current price, combined with the distribution, makes this a very interesting option and one I may add to my portfolio.
