A new playing field

The Fund returned +0.1%, delivering a strong outperformance of +1.9% relative to the S&P/ASX 300 A-REIT Index. A-REITs fell -1.8% in May but outperformed the broader equities market, despite a rise in both cash rates and bond yields during the month.

The Fund’s outperformance was driven by holdings in NextDC (NXT +11.8%), Qualitas Ltd (QAL +9.8%), and HealthCo Healthcare and Wellness REIT (HCW +4.4%).  We highlight that the majority of the Fund’s outperformance was attributed to exposures to the alternative real estate sector, which is supported by secular trends and has seen less impact from rising interest rates and inflation.

Top Holdings (alphabetically)

Goodman Group

Australia

Real Estate

Goodman Group is an integrated industrial property group. The Group has operations in Australia, New Zealand, UK, Asia and Europe. Goodman's activities include property investment, funds management, property development and property services. The Group's property portfolio includes business parks, industrial estates, office parks and warehouse/distribution centers.

GPT Group

Australia

Real Estate

GPT Group is an active owner and manager of a diversified portfolio of Australian retail, office and industrial property assets. The Group's property portfolio include the MLC Centre, Australia Square, Rouse Hill Town Centre and Melbourne Central.

HealthCo REIT

Australia

Real Estate

HealthCo REIT, doing business as HealthCo Healthcare and Wellness REIT, operates as a real estate investment trust. The Company invests in hospitals, aged, child, government, life sciences, research, primary care, and wellness property assets. HealthCo Healthcare and Wellness REIT serves clients in Australia.

Lifestyle Communities

Australia

Real Estate

Lifestyle Communities Ltd Limited provides resort style housing for individuals in their fifties and older.

Stockland

Australia

Real Estate

Stockland is a diversified Australian property group. The Group develops and manages Retail centers, Residential Communities and Retirement Living assets with a focus on regional centers and outer metropolitan. Stockland also owns a portfolio of Office and Industrial assets.

We believe the market is entering a new playing field with higher inflation, higher interest rates, and lower growth.  The recent CPI data showed a 6.8% y-o-y, stubbornly higher than the market anticipated.  This combined with the 5.75% increase in award wages, at a time when productivity growth is low, has led many market participants to now expect cash rates to remain higher for longer.

So how have REITs performed in this environment? 

Quarterly company updates have underscored the operational resilience of the sector, with the following being reported:

• The majority of A-REITs maintained their earnings guidance. Goodman Group (GMG) upgraded earnings and Vicinity Group (VCX) lifted its earnings guidance to the top end of the range, whilst Mirvac Group (MGR) lowered guidance by 5%.
• Retail sales growth remained healthy at 15% above 2019 despite rising cost of living pressures.
• Office occupancy is holding up better than expected with average occupancy at 93%, whilst REITs with higher quality assets reported a modest decline in incentives. This further reinforces the flight to quality as tenants reassess their office requirements post COVID.
• Industrial markets continue to benefit from low vacancies (<1%) resulting in rental growth of +22%.
• Residential REITs reported a slowdown in settlements from the peaks of 2022, but prices are holding up with medium and long term demand supported by strong population growth and a lack of supply.

The Fund is well positioned to benefit from the upside in industrial and residential markets with a combined exposure to these two sub-sectors of 38%. Whilst our exposure to alternative real estate assets (23%) such as data centres, childcare, healthcare, and retirement living helps protect the portfolio from rising interest rates and inflation.