For the month of April, the Fund returned -0.7% compared to the benchmark of +0.7%. Key detractors from performance included our overweight positions in Charter Hall Group (CHC) and Ingenia Group (INA), whilst our overweight position in SCA Property Group (SCP) added to our performance.
The macro-environment has been the key driver of performance for the A-REIT sector since the beginning of the year as investors evaluate the impact of record-high inflation and rising interest rates. As highlighted in our previous newsletter, in isolation, real estate should benefit from inflation as rents are generally indexed to CPI over the longer term and capital values of buildings should lift as building costs increase. However, this is offset by the prospect of faster-than-expected rate rises and the impact that has on earnings through higher costs of capital and valuation.
Based on the March 2022 quarterly updates released by A-REITs, property fundamentals remain strong with the impact of COVID now largely behind us. Retailers are bouncing back from COVID, with retail REITs reporting strong comparable sales of >10% compared to pre-COVID levels. The recovery in sales is also starting to be reflected in leasing outcomes with groups such as Stockland (SGP) continuing to achieve positive leasing spreads of 1-2% and Vicinity Centres (VCX) also seeing an improvement.
In the office sector, net effective rents have largely bottomed in Sydney, with Dexus Group (DXS) reporting limited change to incentive levels of 30% and occupancy remaining at 95%. Whilst there remain mixed views on the structural shift to working from home (WFH), flight to quality will be a key differentiator. As corporates consider their future office space requirements, we expect greater demand for high-quality, sustainable buildings with modern amenities and collaborative workspaces. Older buildings will require significant capex to modernise or risk becoming obsolete as corporates focus on improving their workforce’s wellbeing and enticing them back into the office. For example, Mirvac Group (MGR) highlighted the increased bifurcation in office with A-grade office vacancy in Sydney at 6.6% in assets built post-2000, which compares to 10.5% in assets that were built pre-2000.
The industrial sector continues to be performing strongly. Vacancy remains at historic lows which should support rental growth of 3% and high occupancies, particularly for infill locations. Looking at offshore peers, Prologis in the U.S. reported rental uplifts of 19% and same-store NOI growth of 8.7% whilst SEGRO in Europe reported a 23% uplift in rent reviews and renewals for 1Q22. As noted by Goodman Group (GMG), their ability to extract rental growth will be the key driver of asset valuations going forward.
For residential developers such as SGP and MGR, delays in settlements have been reported caused by severe wet weather conditions and labour shortages due to COVID isolation rules, pushing settlements back into 4Q22 and FY23. Importantly, while construction costs have increased, overall costs remain within project feasibilities and costs have been passed through in higher sales prices with margins achieved at the upper end of their target range. However, with interest rates rising, affordability constraints, and stimulatory impacts moderating, we remain cautious on the outlook for residential markets and prefer affordable products with exposure to manufactured homes estates (MHE) and land sub-divisions. We are positive on the outlook for apartments given relative affordability to housing and supply shortages, however, expect this to also be dependent on the speed of a migration recovery.
With the uncertainty of rising rates, we remain focused on three key factors – positive free cash flow, strong balance sheets, and good management with a track record of delivering sustainable earnings growth. We remain overweight in the alternative sector at 20% of the portfolio compared to the index of 6%, as we believe it not only provides diversification but also more sustainable earnings. Alternative REIT sectors are driven by secular trends and are less cyclical compared to traditional core sectors such as retail, office, and industrials.
Portfolio Manager
Investment Specialist
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.
1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. The Fund incepted on March 11th 2020. Index performance calculations include a complete month’s performance for March 2020. No allowance has been made for buy/sell spreads. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 11 March 2020.
3. Annualised standard deviation since inception.
4. Relative to S&P/ASX 300 A-REIT TotalReturn Index.
* For further information regarding fees please see the PDS available on our website.
