Commentary

The Fund fell by 4.4% over the month slightly underperforming the S&P/ASX 300 AREIT Index.  AREITs suffered over the month due to the Australian 10 year bond rates rising 16 basis points providing a headwind for the yield sensitive real estate sector.  With the RBA’s decision to hold rates steady over the month and maintain its accommodative stance, we expect this to provide support for the sector over the medium to long-term.  The Fund’s exposure to real estate fund managers such as Charter Hall Group (CHC) and Centuria Group (CNI) had a negative impact, whilst our residential exposure in Cedar Woods (CWP) and Ingenia Group (INA) contributed to performance.

As structural and secular trends are disrupting the retail, office and industrial sectors, these trends are also supporting the emergence of alternative sectors. In Australia, the emergence of these alternative sectors is still at an early phase that will drive growth opportunities for many years to come.

The AREIT sector is increasingly gaining exposure to structural themes that will likely play an important role in the 21st-century economy – these include increased data usage, e-commerce, logistics, growth in infrastructure spending and renewable energy sources.

Currently, the AREIT market is still very much dominated by the core sectors such as retail, office and industrial – making up 94% of the index compared to alternative assets of only 6%. This is in significant contrast to global peers, particularly in the US and UK where alternative sectors make up more than 50% of the index.

We believe Australia will follow these established trends for the following reasons:

• The search for income grows harder with historically low fixed income yields and extremely accommodative monetary policy undertaken by central banks, including the RBA, means sectors with sustainable income sources will be in great demand.
• The structural shift to e-commerce, whilst hurting the bricks and mortar of discretionary retail malls, is benefiting sectors such as logistics and data centres. According to Colliers International, every $1 billion spent on online sales requires approximately 85,000 sqm of warehouse space. To put this in perspective, Colliers is forecasting online sales to grow by $12.8 billion in 2021 [in Australia], which would result in about one million square metres of warehouse demand from e-commerce alone in 2021. Whilst, the structural shift to online retailing was accelerated by COVID-19, we believe it is here to stay and will even accelerate further. This is based on several retail chains in the US having increased their estimate of where online penetration is likely to stabilise from 20-30% to 40%-50%.  We see Australia following the same trend with the current online penetration increasing from 11% to 20% by 2025.
• Corporations freeing up their balance sheets through sale and leaseback transactions will open up new assets which have traditionally been held by owners and operators such as hospitals, farms, petrol stations, data centres, student housing, telco exchanges, and cold storage.
• The structural shift of working from home (WFH), if adopted post the pandemic will increase the demand for assets supporting more flexible working such as shared office space, data centres and storage.
• More capital from global investors is expected to chase alternative assets as retail is still unpopular and industrial is becoming increasingly competitive. This helps make these new alternative asset classes attractive, especially those that have proven to deliver strong returns in other global markets such as data centres, manufactured housing, childcare, education, petrol stations and storage.

Our Fund recognises the importance of these secular and structural themes. The ability to invest outside the index allows us to identify these investment opportunities.  Currently, the fund has close to 40% invested in non-index stocks with exposure to logistics, childcare, retirement living, data centres, storage and manufactured housing.