Platform Availability
AMP North, BT Panorama, Centric, Dash, Hub24, Macquarie Wrap, Mason Stevens, Netwealth, Praemium
Description
A Property Fund focussed on capital security, income yield, and sustainable growth.
The Fund believes each security has an underlying or intrinsic value and that securities become mispriced at times relative to their value and each other.
The Fund seeks to exploit such market inefficiencies by employing an active, value based investment style to capture the underlying cashflows generated from real estate assets and/or real estate businesses.
The Fund believes that responsible investing is important to generate long term sustainable returns. Incorporating ESG factors along-side financial measures provides a complete view of the risk/return characteristics of our property investments.
The Fund is benchmark unaware. All positions are high conviction and assessed on a risk-reward basis, resulting in a concentrated portfolio of 10-20 securities.
COMMENTARY
FY25 has been marked by heightened volatility, largely driven by policy uncertainty under the Trump administration (post “Liberation Day”) and escalating geopolitical tensions worldwide.
Amid this global uncertainty, Australia’s relative economic and political stability enhances the appeal of A-REITs, particularly as the prospect of further interest rate cuts strengthens their investment appeal.
With rates expected to come down further, we anticipate continued sector-wide benefits from lower debt costs. In fact, the real estate landscape is more favourable now than at any time since the onset of COVID. Headwinds are dissipating, with structural tailwinds strengthening. These include declining interest rates, bottoming asset valuations, strong rental growth, driven by population growth and constrained new supply due to high construction costs, slow planning approvals, and low productivity. Following the reset in asset values, there is now a greater relative value in completed assets and core real estate compared to increasing replacement costs.
We believe REIT earnings for FY25E are largely de-risked, with guidance provided in August 2024 tracking in line with market expectations. As we enter the reporting season, we anticipate a constructive tone from REITs, underpinned by a macroeconomic backdrop that is increasingly supportive of both NTA and earnings growth.
Sub-sector performance and outlook:
Retail continues to be resilient despite cost-of-living pressures: Solid operating metrics of high occupancy (>98%) and a healthy leasing environment with low occupancy costs (14-17%) provide scope to support further rental growth. Going forward, the strong fundamentals coupled with an unprecedentedly low supply (driven by high construction costs) are expected to have a greater positive impact in driving increases in valuations.
Industrial moderating but leasing spreads remain strong: The sector is experiencing a return to normalisation following a sustained period of strong rental growth. Capitalisation rates have stabilised around 5.5%, with leasing spreads averaging approximately 35% (down from c40%-50%). Additionally, portfolios held by REITs remain under-rented by an estimated 15–20%, which continues to support asset valuations and underpins the potential for further earnings growth.
Office cycle turning: Valuations are stabilising, and effective rental growth appears to be turning a corner, with Sydney core markets showing modest gains of around 1%. Capitalisation rates for premium assets are at or near their cyclical peaks, ranging from 6.10% (Mirvac Group) to 6.17% (Dexus Group). The bifurcation in asset quality and location is evident. Incentives have stabilised at approximately 35%, and vacancy rates for premium assets in core locations remain low (Mirvac: <5%), significantly outperforming metro areas (Growth Point Group: ~8%) and the national average of 15%, reflecting the superior quality of assets held by REITs.
Residential outlook positive, rebound in sales volumes: Improving market sentiment has driven record pre-sale volumes for groups like Mirvac and Cedar Woods, alongside solid sales price growth. This has resulted in a strong second-half skew to settlements in FY25 and provides a positive foundation for earnings growth into FY26. There are early signs of cost stabilisation, while labour shortages and subcontractor insolvency risks are being actively managed. Combined with continued price growth and easing cost of capital pressures, FY25 is shaping up to be the cyclical low point, positioning the residential sector for a return toward through-the-cycle margins.
The Fund maintains a positive outlook on the residential and discretionary retail sectors, supported by ongoing supply constraints. It also sees positive tailwinds for the alternative sectors supported by attractive structural thematics such as data centres, land lease communities, self-storage, and real estate private debt. The Fund’s current portfolio offers an aggregate distribution yield of 5% and forecast earnings growth of 7%, underpinning a strong total return outlook for FY26.