3 things to consider in the current environment

The main detractors for the month were our exposures to residential developers, including Cedar Woods Properties (CWP -20.54%), Qualitas (QAL -22.34%) and GemLife Communities (GLF -17.01%). However, these positions have been key contributors to performance over the past 12 months, led by Cedar Woods Properties (CWP +42.30%), Aspen Group (APZ +62.59%) and Peet Limited (PPC +15.95%).

Escalation of geopolitical tensions in the Middle East has weighed on the sector, pushing bond yields higher and bringing inflation risks back into focus.

There are several factors to consider: 1) Are higher bond yields reflected in valuations? 2) Should investors start buying A-REITs? and 3) Is the energy and supply chain shock triggered by the conflict comparable to those seen during the pandemic?

• Australian 10-year bond yields have moved above 5.0%, putting pressure on REIT valuations. At current levels, GPT Group’s (often used as a proxy for the sector) implied cap rate (~6.8%) is broadly in line with historical levels when yields were last this high, suggesting market pricing remains reasonable. However, the recent rise in yields could still drive modest cap rate expansion of around 25–50 bps from December 2025 book values.
• The forward yield curve is currently pricing in three additional RBA rate hikes in May, August, and September 2026. If realised, the optimal entry point would likely be toward the end of the hiking cycle, around 3Q CY26. However, several economists expect no further rate hikes, forecasting the cash rate to remain at 4.1% through to 2027 before easing begins, with 25 bp cuts anticipated in May and August 2027. Under this scenario, the opportunity to accumulate the sector is already emerging. Supporting this view, the sector is currently trading on a 1-year forward P/E of 14.8x, well below its 10-year average of 16.6x.
• While the Iran conflict is disrupting around 20% of global oil flows, as well as roughly one-fifth of LNG supply, and ~30% of traded fertilisers, the shock is more contained than previous disruptions. Importantly, it is occurring against a backdrop of elevated inflation uncertainty, with most G10 economies still running above-target inflation and inflation expectations remaining elevated across consumers and businesses. By contrast, during the pandemic, supply chain disruptions affected a broad range of industries simultaneously, with wholesale trade, utilities and logistics transmitting cost pressures across much of the CPI basket, exacerbated by constraints on both goods and labour mobility. The current shock is narrower and largely concentrated in commodity channels, although broader impacts could emerge if the conflict prolongs and escalates further.

Putting the above into perspective, we see good buying opportunities in high quality names such as Goodman Group.  In the residential sector, we are more selective – peak margins, rising costs and lower settlement volumes are potential headwinds for larger scale developers. However, we still see pockets of value in smaller, more affordable product offerings such as Cedar Woods Properties and Peet Limited, where there is valuation support from our bottom up analysis.