The ASX stock market is seeing pain in a variety of industries as valuations reverse some of the gains we've seen this year. ASX bank shares like Commonwealth Bank of Australia (ASX: CBA) or ASX tech shares like Xero Ltd (ASX: XRO) have dropped further than the S&P/ASX 200 Index (ASX: XJO). But I think one ASX share sector could be particularly appealing.
I'm talking about the real estate investment trust (REIT) sector, which includes businesses that own commercial properties. REITs can be focused on industrial properties, office buildings, shopping centres, storage units, farmland, and so on.
REITs can be a good investment in most economic circumstances, but I think this could be a particularly good time for this ASX share sector for two key reasons.
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Stable rental profits
At a time when the US is imposing tariffs on products from countries like Canada, Mexico, China, and the EU, this raises questions about what may happen to the profits of businesses exposed to the global share market.
Investments that generate stable and growing earnings could be particularly useful during this period. Investors may be willing to pay more for earnings from a stable business than for businesses with cyclical earnings (such as mining or retail).
Many REITs have tenants on long-term contracts, which means they can give investors a lot of visibility of what the rental income may look like in the coming years. They usually pay out most of their rental profit each year too, creating a pleasing distribution yield.
I'd look to businesses like Charter Hall Long WALE REIT (ASX: CLW), Centuria Industrial REIT (ASX: CIP), Rural Funds Group (ASX: RFF), Scentre Group (ASX: SCG), and BWP Trust (ASX: BWP).
Interest rates to lower further?
Over the last several months, I've highlighted numerous times that businesses that are particularly sensitive to interest rate cuts could be a good place to invest.
With most REITs having a sizeable amount of debt on their balance sheets, they could benefit from a reduction in financing costs and a potential boost to their property values.
It is not certain what the RBA will do this year, but I wouldn't be surprised if there is another rate cut or two by the end of 2025. In my view, this could be very helpful to the property ASX share sector.
When I consider which ASX share sectors could deliver positive total returns (share price plus distribution returns) in 2025, even if the tariff trade war worsens, I think REITs could be a defensive option.
