Time to look forward

The past year has been a challenge for the AREIT sector with rising inflation affecting bond yields and cash rates.  With inflation slowing from the peak of 8% to currently 4.6%, markets are starting to factor in a more stable interest rate environment which is supportive of the REIT sector as it impacts valuations and the cost of capital.

A-REITs had a strong rebound in November, with the index up 10.93% as Australian and US bond yields dropped in response to positive inflation prints during the month, dampening probabilities of future rate hikes.  With ‘peak rates’ now in sight, investors turned to names that have been oversold over the past year. In particular, fund managers saw the largest gains over the month, with Centuria Group (CNI +27.95%) and Charter Hall Group (CHC +19.95%) among the top performers.

The Fund returned 8.3% in November.  The main contributors to performance were Centuria Group and Stockland Group (SGP +16.67%), whilst our holding in Healthco Healthcare and Wellness REIT (HCW -3.64%) and Qualitas Limited (QAL -6.52%) detracted from performance. These two stocks were impacted due to small cap volatility, but we remain confident in their ability to grow earnings over the medium to long-term outlook. For the past 12 months rolling, the Fund returned 2.8% compared to the benchmark of 0.7%.

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.

So where to from here? The sector is currently trading at an average 20%-30% discount to NTA’s (from 30-40% last month). If bond yields and the BBSW futures curve continue to fall, this could indicate the end of several years of rising interest expenses and falling valuations.

Can the gap be fully closed? We believe transactional evidence is still weak, particularly in the office sector. Positively, in the last six months industrial and small retail assets have been sold at book value. As interest rates stabilise, we expect more transactional evidence to emerge. The up and coming half-yearly reporting season will be an important one as the market will assess the health of REITs and which are best placed to take advantage of the current dislocation and have the capacity to set themselves up for the next growth cycle.

We have positioned the portfolio to invest in REITs that have a strong balance sheet to drive growth and leverage to sectors that are well-placed to benefit from a market recovery. These include Goodman Group with its $50 billion data centre development pipeline to leverage into the structural shift towards cloud computing and AI, as well as Stockland Group (residential) and Scentre Group (large retail mall) who are both beneficiaries of the anticipated population growth with over 700,000 new immigrants expected to be entering Australia over the coming years.

We remain cautious about office REITs due to the ongoing structural impact of working from home and the cyclical impact of a softer economy, which may delay the recovery in the sector even as bond yields decline.

As we move into the final month of the calendar year we will look to deliver a ‘year in review’ in early 2024. Please let us know any questions you would like us to cover, either specific to the sector, Portfolio, or any portfolio holdings below.