In what is set to be the ASX market’s biggest initial public offering (IPO) this year, property developer Home Consortium Limited (ASX: HMC) has secured at least AU$300 million for its spinoff real estate investment trust (REIT) fund.
The new fund, called HomeCo Daily Needs REIT (proposed ticker ASX: HDN), will list on the ASX on 23 November. It is expected to offer 484 million units at $1.33 per unit, which brings its market cap at IPO of $644 million.
What assets are included in the HomeCo REIT fund?
As part of its effort to bring the fund to IPO, HomeCo has been actively acquiring retail shopping mall properties in NSW, Victoria, and Queensland.
Since July, it has purchased three shopping centres from Woolworths Group Ltd (ASX: WOW), along with assets in Western Sydney worth $220 million. Overall, it has seeded the fund with 17 malls worth $844 million.
It’s worth noting that the fund has specifically chosen to anchor these properties with major supermarket tenants – hence the name ‘Daily Needs’. It specifically named supermarkets Woolworths and Coles Group Ltd (ASX: COL) as these anchor tenants.
The prospectus goes on to say that the portfolio has a 98 per cent occupancy rate, and 8.4 years average lease expiry. It was pitched to investors with 5.5% yield based on FY21 projections, with a total return story of 10% that includes capital gains.
Is REIT a good investment?
REITs in general are a good diversifier for your overall portfolio. In addition to having a low price correlation with other shares in your portfolio, it can also give exposure to commercial properties in various geographical locations that you otherwise would not get from buying a single private dwelling.
REITs usually offer relatively high dividends and potential long-term capital gains. Due to the nature of its underlying assets, REIT share prices are usually less volatile than other shares because properties tend to follow a more stable price movement and trajectory pattern.
So should I buy the HomeCo REIT shares?
In this ultralow interest rates environment, any investment that can provide a yield pick-up should definitely be considered. The HomeCo REIT’s expected dividend yield of 5.5% could boost your portfolio return, and provide a steady income above term deposit rates for many years to come.
In Australia, there is no one single property market. Instead, the market is fragmented by states. The fact that the HomeCo REIT’s assets are spread over different states clearly offers good diversification.
As the retail mall concept around the world is gradually pushed to the brink in the face of e-commerce competition, properties that are exposed to the non-discretionary retail sector will stand the most chance of surviving.
Non-discretionary assets refer to those investments which are not exposed to discretionary spending. Supermarkets like Coles and Woolworths are examples of the non-discretionary retail sector as they provide consumer staples.
Although COVID-19 has generally put a lot of strain on the property sector, I think HomeCo has timed its purchases well and managed to pick up properties at good prices. Along with household names like Woolworths and Coles as anchor tenants, this REIT may just provide a good stable addition to your portfolio.
More reading
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- What to expect from the Coles Q1 update this week
- ASX 200 Weekly Wrap: ASX snaps winning streak… just
- 5 things to watch on the ASX 200 next week
- Why you shouldn’t sweat the small stuff when it comes to investing
Motley Fool contributor dsunarto has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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