SUMMARY
The Fund delivered a return of +3.9% for the month, and +23.1% for the year.
Key contributors for the year included our high conviction call to be underweight office-exposed stocks such as Mirvac Group (MGR +0.17%) and Dexus (DXS +1.43%), alongside our overweight position in Ingenia Communities Group (INA +31.22%), where the new CEO is driving a strong earnings upgrade.
The A-REIT sector had a strong start to the year, delivering a +4.6% return in January, marginally outperforming the broader equities market (+4.50%), despite Goodman Group (GMG), which returned just +2.3%.
COMMENTARY
REIT earnings are at an inflection point, having seen growth largely wiped out by rising debt costs over the past two years. As cash rates are projected to come down from 4.35% to 3.60% over 2025, we anticipate a return to positive sector earnings growth this year, and acceleration over the next two years as debt costs begin to ease.
In terms of the sub-sector outlook, we expect industrials to slow from a three-year period of outperformance, as leasing spreads moderate and vacancies rise from 0.5% to 3-4%. The retail sector is expected to remain resilient, with strong retail sales bolstered by the prospect of rate cuts, robust income growth and population growth. The office sector is likely to have passed its valuation trough, but operational challenges persist with high incentives and vacancy rates dampening effective rental growth. The residential sector stands to benefit from a combination of lower interest rates, strong focus on housing in the upcoming elections, strong employment and structural undersupply, which should lead to a pick-up in sales volumes and consumer sentiment.
We don’t expect the February reporting season to be a major positive catalyst. The 2-3 anticipated RBA rate cuts and gradual decline in 10-year bond yields should create a trough in earnings growth and NTAs for REITs, and present more inorganic growth opportunities, particularly for REITs with a competitive cost of capital.