SUMMARY
The A-REIT sector declined 3.3% in February, driven by a 25bps rate hike early in the month and continued market concern around the prospect of further rate rises. In comparison, the Fund returned -2.2%, outperforming the benchmark by 1.1%.
Top contributors to performance came from our residential exposures in Cedar Woods Properties (CWP +12.11%), GemLife Communities (GLF +6.36%) and Peet Limited (PPC +6.93%).
Portfolio Manager Amy Pham also provides a brief Q&A update below, reviewing the February 2026 reporting season and sharing her outlook on the A-REIT sector.
COMMENTARY
The 1H26 reporting season highlighted the underlying resilience of the A-REIT sector. Operational conditions remain solid, with improving asset valuations and continued capital deployment despite a higher interest rate backdrop. Many REITs also took the opportunity to refinance their debt facilities, extending tenure while achieving average margin savings of 35-40bps.
Operationally, rent growth remains healthy, development conditions are normalising, and asset valuations are stabilising. NTA growth is resuming across the sector (+2% on average), with the strongest growth in manufactured housing estates and retail, while office and logistics were more subdued. Despite rising cash rates and bond yields (3-year swap rose +90bps to 4.3% since October 2025), earnings momentum has remained intact.
Overall, the February reporting season delivered strong outcomes, with most companies reaffirming earnings guidance. Importantly, there were thirteen guidance upgrades (or companies guiding to the upper end of their ranges) and no downgrades across the sector.
Active business models continue to show strong momentum. Fund managers can still raise and deploy capital, with Charter Hall reporting record equity inflows in the half. Developers, including Mirvac, reported improving margins and a normalisation in operating conditions.
Despite upbeat 1H26 updates, the A-REIT sector fell in February, underperforming the broader market by 7.2%, as banks and materials led market gains. In our view, the pullback appears more reflective of sector rotation than a deterioration in fundamentals, with earnings and asset values continuing to track positively.
Heightened geopolitical tensions in the Middle East are contributing to market volatility by pushing oil prices higher and reinforcing inflation concerns. While this raises the risk of a higher-for-longer interest rate environment, which can weigh on the sector in the near term, A-REITs remain supported by resilient earnings underpinned by contracted rental income and the capital protection provided by tangible asset values.
We remain constructive on the sector, with the most compelling opportunities in affordable residential developers including Cedar Woods Properties (CWP), Ingenia Communities Group (INA), Gemlife Communities (GLF) and Peet Limited (PPC), where structural demand continues to outstrip supply. Goodman Group (GMG) remains a core holding, with the remainder of the year expected to deliver significant catalysts through data centre leasing activity and capital partnering initiatives. At around 19x PE and with earnings projected to grow at approximately 12% over the next three years, we view the stock as undervalued.