Investing in ASX property shares

What are ASX property shares?

ASX property shares include developers and operators of commercial, industrial, and residential real estate. This includes companies that own and manage warehouses, shopping centres, office buildings, and even residential buildings.

ASX property stocks can be an excellent way for everyday investors to gain exposure to the real estate market without coughing up the money for a house deposit. You can purchase a diversified portfolio of real estate assets with property shares for a relatively low initial outlay.

A common type of property share is a real estate investment trust (REIT). REITs are similar to mutual funds in that they raise money from many investors and then use this capital to make investments. However, rather than invest in shares, bonds or other financial assets, REITs invest in property.

REITs offer many of the same benefits as an investment property. Their prices tend to remain relatively stable and appreciate over time, and they generate regular rental income, which is paid to investors in the form of distributions and dividends.

Why invest in them?

Property offers different risk and return characteristics from shares and bonds, which can provide diversification benefits for your portfolio.

Real estate is typically regarded as a lower-risk investment than shares and most other financial assets, which means property prices are usually less volatile than share prices. And, given real estate's inherent scarcity, it also tends to increase in value over time.

But physical real estate – especially commercial and industrial – is often prohibitively expensive for the everyday investor.

This is where ASX property shares come in.

They provide many of the risk and return characteristics as physical property, but you don't have to be a millionaire to invest in them. And, because there is such a wide range of ASX-listed property companies to choose from, even everyday investors can quickly build a diversified property portfolio.

Top property stocks on the ASX

The ASX real estate sector comprises two main industry groups. They are REITS and property managers and developers.

There are many different categories of REITs to choose from on the ASX. Some REITs invest in hotels and resorts, retail properties, or office space. There are also diversified REITs that invest in many different sorts of properties all at once. 

Property developers invest in real estate to construct new housing, infrastructure or other projects, while property managers usually operate and maintain properties on behalf of the property's owner. 

There are many different property developers listed on the ASX. Examples include Lifestyle Communities Ltd (ASX: LIC), which specialises in building retirement communities, and Lendlease Group (ASX: LLC), which coordinates the construction of large infrastructure projects and even entire office buildings.

Here are three top ASX property shares ranked by market capitalisation from highest to lowest.

Goodman Group

Goodman is a property investment and management company with a focus on industrial real estate for the retail, automotive, and logistics industries. This includes property such as warehouses, depots, and business parks.

Goodman is the largest listed real estate company on the ASX and has a property portfolio with assets in Australia, New Zealand, Asia, Brazil, the United Kingdom, Europe, and North America.

Goodman Group's strategy focuses not just on ownership but also on property development. The company purchases real estate in strategic locations and then develops it into new depot and warehouse facilities to support its customers from the logistics industry.

Scentre Group

Scentre Group owns and operates the well-known Westfield brand of shopping centres. More than 20 million people in Australia and New Zealand live close to a Westfield shopping centre, making it one of the country's most ubiquitous mall brands. The group's property portfolio comprises 42 shopping centres across the two countries, with an ownership stake valued at $34.4 billion. 

Its share price is still trading well short of pre-pandemic levels. Scentre stock plunged at the onset of the COVID-19 pandemic, as lockdowns and social restrictions badly hurt the bricks-and-mortar retail sector. Since then, rising interest rates have had the twin effect of damaging consumer confidence and driving uncertainty in the property market, both of which are bad for retail property companies like Scentre Group.

Scentre pays a generous dividend, with a yield of more than 5%.

Dexus

Dexus is a REIT that invests in commercial, industrial, retail, and healthcare properties. It targets high-quality real estate across Australia's major cities, intending to generate sustainable income streams for its investors. 

It owns a diversified portfolio of real estate assets valued at almost $18 billion and manages a portfolio worth $45 billion. It also has almost $16 billion in its development pipeline.

As with Scentre Group, Dexus shares have struggled since the onset of the pandemic. With more people embracing working from home than ever before, the outlook for the commercial real estate sector has become more uncertain. Along with rising interest rates, this may be driving the recent volatility in the Dexus share price.

Dexus pays an even more generous dividend than Scentre Group. Its yield is currently more than 6%.

Benefits of investing in ASX property shares

We've gone over most of the pros of ASX property shares already:

Lower price volatility: Property prices tend to be more stable over time than share prices, which can make property a good diversifier, especially when the stock market is volatile. 

Regular income stream: Most property companies make money in the form of rent on the properties they own or fees on the properties they manage. Because these payments are usually regular and predictable, it allows ASX property shares (especially REITs) to pay regular distributions and dividends to their shareholders.

Low-cost diversification: Investing in ASX property companies is a great way to gain exposure to the property market without having to pay the high ownership costs yourself.

And the cons?

Sector-specific risks: Given the high cost of owning property, some ASX property companies and REITs may only be able to invest in a small number of real estate assets, which can make them higher-risk investments.

For example, Scentre Group, which owns the Westfield brand of shopping centres, was significantly impacted by COVID-19 pandemic restrictions. Other property companies with a more diversified portfolio didn't see their share prices drop by anywhere near as much at the onset of the pandemic.

Interest rate risks: Rising interest rates can also negatively impact property shares. This is because many REITs and other property companies are highly leveraged. Rising interest rates increase the interest REITs have to pay on their debt.

Cyclical market: Despite its benefits as a diversifier, some property markets can also be very cyclical in nature, which means prices may rise and fall with the economic cycle. 

For example, a central bank will normally start hiking interest rates in response to an overheating economy where inflation is high. One of the desired outcomes of this process is for household and business spending to decrease, cooling down the economy and hopefully bringing down inflation. 

Rising interest rates also increase the costs of servicing a loan, which can particularly hurt the profit margins of highly leveraged property companies. And when the broader economy contracts, it dampens demand for retail, commercial, and industrial property.

What might the future hold for the Australian property industry?

The Australian property market tends to be remarkably resilient over time and has delivered some fantastic returns to investors.

However, there are several factors posing risks for the near-term outlook. As interest rates rise, loan repayments increase which – as we've already mentioned – can squeeze the profit margins of highly leveraged real estate companies.

Higher rates also dampen consumer confidence, in turn hurting retail and other businesses. This can reduce occupancy rates for commercial, retail, and industrial property, potentially threatening the rental income many property companies rely on for revenue.

This doesn't present the rosiest outlook for ASX property companies. However, as interest rates peak and then decline again, a broad market recovery may be on the cards over the longer term. 

Are ASX property shares a good investment?

ASX property shares are a great, low-cost way to expose your portfolio to the property market. You can invest in a diversified commercial, industrial, or residential real estate portfolio in a single trade.

And if you are an income-seeking investor, REITs can be a very practical choice. They often pay generous dividends, and their share prices tend to remain stable over time, at least when compared to the rest of the stock market.

However, investing in property shares carries risks – some of which might differ from other shares. Make sure you fully understand these risks before buying ASX property shares.