SUMMARY
The A-REIT sector (-0.04%) underperformed the broader equities market (+2.1%) in July, as 10-year bond yields jumped (+21bps) to 4.93%, and persistent inflation, higher-for-longer interest rates and post-Budget uncertainty weighed on listed real estate sentiment. In comparison, the Fund returned -1.9%, underperforming the benchmark by -1.9%.
Detractors for the month included Centuria Group (CNI -24.03%), Next DC (NXT -8.37%) and GemLife (GLF -4.13%). Centuria Group sold off following concerns over its exposure to the struggling Bathla Group through Bass Credit, CNI’s private credit business. We have reviewed our position and exited the holding, given the potential for Bathla Group’s problematic loan exposure to weigh on Centuria’s reputation and its ability to grow FUM.
COMMENTARY
The sector experienced some weakness over the month, with softer performance across a number of REITs. Despite this weakness, the sector’s setup now looks compelling, trading at an undemanding 14x forward P/E and an 8% discount to NTA (ex GMG & CHC), with a 3-year EPS CAGR of 5.8% pointing to improving earnings growth.
The macro backdrop remains the key driver of valuations, with the RBA expected to stay on hold through 2026 and rate cuts likely delayed until late 2027 depending on data. Since earnings expectations are largely reflected in consensus forecasts, this reporting season’s focus will be on FY27 guidance and management outlook rather than current results. Property fundamentals remain broadly supportive, with retail performing strongly, industrial normalising, office stabilising, and residential demand easing but structurally supply-constrained. New supply across all sectors remains below trend as elevated construction costs continue to delay development.
We continue to support REITs with strong balance sheets and sectors that have strong structural tailwinds, including land lease communities such as Gemlife (GLF), data centres such as NextDC (NXT) and Goodman Group (GMG), and affordable residential developers such as Stockland Group (SGP), Peet Ltd (PPC) and Cedar Woods (CWP).