SUMMARY
The Fund delivered another month of outperformance in June, closing with +0.84% return compared with the S&P/ASX 300 A-REIT Index of +0.23%. For the 2024 financial year, the Fund delivered a strong performance of +27.13% compared to the Index return of +23.79%, generating an outperformance of +3.34%.
Key contributors to outperformance for the year include our underweight position in the office sector (zero holdings in pure office REITs), selective positionings in retail (favour convenience retail) and the alternative real estate sector (such as data centres and senior living). On a stock basis, our investment in NextDC (NXT +41.43%) continued to benefit from the theme of exponential growth in AI boosting data centre demand, whilst Lifestyle Communities (LIC +13.35%) benefited from secular drivers of the ageing population and affordable housing.
COMMENTARY
Looking ahead we see further upside in the sector as rates stabilise and start to come down from these levels. Improved certainty around the outlook for interest rates and asset values troughing is helping regain investor confidence, thereby leading to a pick-up in transaction volumes and providing further market evidence to valuations.
In the short term, interest rates remain volatile and highly data dependent. With the stronger than expected headline CPI measure in May at 4.0% year-on-year, the market quickly vacillates from a potential rate cut to now a rate hike of 0.25% in August to bring cash rates to 4.6%. Whether there’ll be one more rate hike or not, the consensus view is that rates have peaked or are near peaking i.e. we are closer to the end of a rate hiking cycle.
With the back drop of a higher for longer interest rate environment, several positive factors drive the relative performance of A-REITs compared to the broader equities market including: 1) asset values have fallen approx. 25% from their peak and are closer to trough with transaction volumes increasing; 2) debt markets are improving and the impact on FY25 earnings is minimal given most REITs have over 70% of their debt hedged; 3) consumers have broadly remained resilient which is positive for retail malls and 4) less office supply to come on to the market will lead to improved vacancy rates and effective rents.
We remain selective and favour REITs with a strong balance sheet and high visibility of earnings. The Fund is forecast to deliver a total return of 10% (4% distribution growth and 6% earnings growth) over the next 12 months. This is underpinned by holding high quality businesses such as Goodman Group (GMG) and Stockland Group (SGP) and the alternative real estate sector. Our selective positions in non-index stocks demonstrate where the Fund differentiates from its peers, providing an opportunity to gain exposure to businesses that are benefiting from secular trends such as data centres, senior living, real estate private credit, childcare, and healthcare.