Looking ahead to FY25

The Fund delivered another month of outperformance in June, closing with +0.84% return compared with the S&P/ASX 300 A-REIT Index of +0.23%.  For the 2024 financial year, the Fund delivered a strong performance of +27.13% compared to the Index return of +23.79%, generating an outperformance of +3.34%.

Key contributors to outperformance for the year include our underweight position in the office sector (zero holdings in pure office REITs), selective positionings in retail (favour convenience retail) and the alternative real estate sector (such as data centres and senior living).  On a stock basis, our investment in NextDC (NXT +41.43%) continued to benefit from the theme of exponential growth in AI boosting data centre demand, whilst Lifestyle Communities (LIC +13.35%) benefited from secular drivers of the ageing population and affordable housing.

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.

HomeCo Daily Needs REIT

Australia

Real Estate

HomeCo Daily Needs REIT operates as a real estate investment trust. The Company invests in and manages portfolio of retail assets.

National Storage REIT

Australia

Real Estate

National Storage REIT engages in providing self-storage and tailoring self-storage solutions to residential and commercial customers. It offers spans self-storage, business storage, records management, climate-controlled wine storage, vehicle storage, vehicle and trailer hire, packaging, insurance and other value-added services. The company was founded in December 2013 and is headquartered in Brisbane, Australia.

Scentre Group

Australia

Real Estate

Scentre Group Limited owns and operates pre-eminent living centre. The Company specializes in the management, development, construction, leasing, and retail solutions. Scentre Group serves customers in Australia.

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.

Looking ahead we see further upside in the sector as rates stabilise and start to come down from these levels.  Improved certainty around the outlook for interest rates and asset values troughing is helping regain investor confidence, thereby leading to a pick-up in transaction volumes and providing further market evidence to valuations.

In the short term, interest rates remain volatile and highly data dependent.  With the stronger than expected headline CPI measure in May at 4.0% year-on-year, the market quickly vacillates from a potential rate cut to now a rate hike of 0.25% in August to bring cash rates to 4.6%.  Whether there’ll be one more rate hike or not, the consensus view is that rates have peaked or are near peaking i.e. we are closer to the end of a rate hiking cycle.

With the back drop of a higher for longer interest rate environment, several positive factors drive the relative performance of A-REITs compared to the broader equities market including: 1) asset values have fallen approx. 25% from their peak and are closer to trough with transaction volumes increasing; 2) debt markets are improving and the impact on FY25 earnings is minimal given most REITs have over 70% of their debt hedged; 3) consumers have broadly remained resilient which is positive for retail malls and 4) less office supply to come on to the market will lead to improved vacancy rates and effective rents.

We remain selective and favour REITs with a strong balance sheet and high visibility of earnings.  The Fund is forecast to deliver a total return of 10% (4% distribution growth and 6% earnings growth) over the next 12 months. This is underpinned by holding high quality businesses such as Goodman Group (GMG) and Stockland Group (SGP) and the alternative real estate sector.  Our selective positions in non-index stocks demonstrate where the Fund differentiates from its peers, providing an opportunity to gain exposure to businesses that are benefiting from secular trends such as data centres, senior living, real estate private credit, childcare, and healthcare.