The AREIT sector has had a strong come back since falling 35% in March 2020. For the six month period to the end of September, the sector rallied 29%, outperforming the broader equities market by 13%.
The AREIT sector has had a strong come back since falling 35% in March 2020. For the six month period to the end of September, the sector rallied 29%, outperforming the broader equities market by 13%.
The outperformance of the AREIT sector was largely due to the following drivers:
1. Things were not as bad as originally expected, with rental collection for office and industrial assets remaining high – on average more than 95%. Rental collection for retail assets was below 50% but headline collection rates showed an improvement as economies started to reopen.
2. The AREIT sector showed value with the spread to 10-year bonds of 330 basis points comparing favourably to the long term average of 200 basis points.
Since the pandemic, the dispersion between quality/income security versus value has widened even further with the top performing stock, Goodman Group (GMG), up 20% compared to Scentre Group (SCG) and Vicinity Group (VCX) both down 36%. The worst performing stock, Unibail- Rodamco (URW), was down 72% since the beginning of March 2020.
Will this disparity continue? We believe it will for the following reasons:
On the flip side, GMG is benefiting from the structural shift of online retailing as logistic assets form part of the supply chain for food and delivery of parcels. This is evident from Amazon’s decision to lease a Sydney warehouse from GMG, alongside large pre-commitments by Coles and Woolworths, lifting the amount of industrial space leased in Australia to a five-year high in 2Q 2020. Between April and June, ~871,000sqm of industrial floor space was leased nationally, according to figures compiled by JLL.
When you couple this structural tailwind with high quality management and a strong balance sheet (gearing of 10%) to take advantage of growth opportunities through developments or acquisitions, the earnings outlook is a lot more secure. GMG has development work in progress to exceed $5 billion by the end of FY20. We expect development margins to remain solid with a healthy spread between prime industrial cap rates of 4%-5% and development yields of 6.5%.
Our investment thesis remains focused on three key factors:
1. Positive free cash flow
2. Strong balance sheet
3. Favourable thematic drivers and long WALEs (weighted average lease expiry).
The Fund is not exposed to discretionary retailing with a zero weighting in SCG, VCX and URW. Our main exposure is in fund managers and developers, such as Charter Hall Group (CHC), Centuria Capital (CNI) and Goodman Group (GMG), and alternative assets. This includes childcare, seniors living, data centres, and affordable housing such as Manufactured Home Estates. We believe these sectors provide both sustainable earnings growth driven by secular trends and diversification from the traditional core sectors of retail, office and industrial.
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Cedar Woods Properties Ltd | Australia | Real Estate Development |
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Charter Hall Group | Australia | Diversified REITs |
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Charter Hall Long Wale REIT | Australia | Diversified REITs |
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Goodman Group | Australia | Industrial REITs |
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Ingenia Communities Group | Australia | Residential REITs |
1 Month | SINCE INCEPTION2 | |
---|---|---|
Fund | 1.0% | 7.4% |
Benchmark | -1.1% | -16.3% |
The AREIT sector has had a strong come back since falling 35% in March 2020. For the six month period to the end of September, the sector rallied 29%, outperforming the broader equities market by 13%.
The outperformance of the AREIT sector was largely due to the following drivers:
1. Things were not as bad as originally expected, with rental collection for office and industrial assets remaining high – on average more than 95%. Rental collection for retail assets was below 50% but headline collection rates showed an improvement as economies started to reopen.
2. The AREIT sector showed value with the spread to 10-year bonds of 330 basis points comparing favourably to the long term average of 200 basis points.
Since the pandemic, the dispersion between quality/income security versus value has widened even further with the top performing stock, Goodman Group (GMG), up 20% compared to Scentre Group (SCG) and Vicinity Group (VCX) both down 36%. The worst performing stock, Unibail- Rodamco (URW), was down 72% since the beginning of March 2020.
Will this disparity continue? We believe it will for the following reasons:
On the flip side, GMG is benefiting from the structural shift of online retailing as logistic assets form part of the supply chain for food and delivery of parcels. This is evident from Amazon’s decision to lease a Sydney warehouse from GMG, alongside large pre-commitments by Coles and Woolworths, lifting the amount of industrial space leased in Australia to a five-year high in 2Q 2020. Between April and June, ~871,000sqm of industrial floor space was leased nationally, according to figures compiled by JLL.
When you couple this structural tailwind with high quality management and a strong balance sheet (gearing of 10%) to take advantage of growth opportunities through developments or acquisitions, the earnings outlook is a lot more secure. GMG has development work in progress to exceed $5 billion by the end of FY20. We expect development margins to remain solid with a healthy spread between prime industrial cap rates of 4%-5% and development yields of 6.5%.
Our investment thesis remains focused on three key factors:
1. Positive free cash flow
2. Strong balance sheet
3. Favourable thematic drivers and long WALEs (weighted average lease expiry).
The Fund is not exposed to discretionary retailing with a zero weighting in SCG, VCX and URW. Our main exposure is in fund managers and developers, such as Charter Hall Group (CHC), Centuria Capital (CNI) and Goodman Group (GMG), and alternative assets. This includes childcare, seniors living, data centres, and affordable housing such as Manufactured Home Estates. We believe these sectors provide both sustainable earnings growth driven by secular trends and diversification from the traditional core sectors of retail, office and industrial.
NUMBER OF STOCKS | 15 |
MAXIMUM DRAW DOWN | -15.8% |
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. 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.