The AREIT sector in a higher-for-longer interest rate environment

The AREIT sector fell -8.66% in September, leading to a material 5.80% underperformance against the broader equities market.  Macro factors weighed on performance with the Australian 10-year bond yields rising from 4.0% to 4.5% as markets digested the possibility that local and global rates would be ‘higher for longer’.

In comparison, the Fund returned -6.93%, outperforming the benchmark by +1.73%.  This was attributed to our large position in non-index stocks, with the majority driven by secular trends, such as healthcare, data centers, and retirement living.

Top Holdings (alphabetically)

Arena REIT

Australia

Real Estate

Arena REIT operates as a real estate investment trust. The Trust owns a portfolio in sectors such as childcare, healthcare, education and government tenanted facilities in Australia.

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.

NEXTDC Ltd

Australia

Information Technology

NEXTDC Ltd. develops data centers. The Company develops and operates carrier and systems integrator neutral data centers in Australia. NEXTDC's customers will also be able to use the data centers as connectivity and content hubs.

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.

The yield-sensitive AREIT sector was negatively impacted during the month with Australian CPI back up at 5.2% and a US strong job print meaning that rates will likely stay higher for longer in order to keep inflation at bay.

However, we believe the sector is looking attractive for the following reasons;

1. The sector is providing an attractive average yield of 6.3%, and trading at large discounts to valuations (-16% discount to NAV and -21% discount to NTA ex GMG and CHC).
2. The higher for longer has already been factored into REIT’s earnings growth with the majority of REITs increasing their interest rate hedging profile from 60% to now over 70%.
3. In addition, property trust earnings, which are based on contracted leases, can prove relatively more resilient as volatility increases due to geopolitical risks and a softening economy.

The sector remains volatile and very much driven by the steepness of the yield curve.  Whilst we believe rates should stabilise from here, we expect inflation to remain elevated and rate cuts are unlikely in the near future.

We continue to favour stocks with strong balance sheets and in sub-sectors that have strong operational metrics, providing earnings growth in order to offset the rise in the cost of capital and inflation.