Setting the foundation for growth

The Fund delivered a return of +3.9% for the month, and +23.1% for the year.

Key contributors for the year included our high conviction call to be underweight office-exposed stocks such as Mirvac Group (MGR +0.17%) and Dexus (DXS +1.43%), alongside our overweight position in Ingenia Communities Group (INA +31.22%), where the new CEO is driving a strong earnings upgrade.

The A-REIT sector had a strong start to the year, delivering a +4.6% return in January, marginally outperforming the broader equities market (+4.50%), despite Goodman Group (GMG), which returned just +2.3%.

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.

Ingenia Communities Group

Australia

Real Estate

Ingenia Communities Group engages in managing and developing a portfolio of retirement and lifestyle communities. It operates through the following segments: Lifestyle Development, Lifestyle Rental, Ingenia Gardens, Ingenia Holidays; Fuel, Food & Beverage Services, and Corporate and Other. The Lifestyle Development segment comprises development and sale of lifestyle homes. The Lifestyle Development segment refers to long-term accommodation within lifestyle and rental communities. The Ingenia Gardens is involved in rental villages. The Ingenia Holidays segment is composed of tourism and rental accommodation within holiday parks. The Fuel, Food & Beverage Services segment is associated with the Group's investment in service station and food & beverage operations adjoined to Ingenia Holiday communities. The Corporate and Other segment relates to the Group's remaining assets and operating activities. The company was founded on November 22, 2003, and is headquartered in Sydney, Australia.

Mirvac Group

Australia

Real Estate

Mirvac Group is an integrated, diversified Australian property group comprising an investment portfolio and a development business. The Company's investment portfolio, Mirvac Property Trust, invests in and manages office, retail and industrial assets and the development business has exposure to both residential and commercial projects.

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.

REIT earnings are at an inflection point, having seen growth largely wiped out by rising debt costs over the past two years. As cash rates are projected to come down from 4.35% to 3.60% over 2025, we anticipate a return to positive sector earnings growth this year, and acceleration over the next two years as debt costs begin to ease.

In terms of the sub-sector outlook, we expect industrials to slow from a three-year period of outperformance, as leasing spreads moderate and vacancies rise from 0.5% to 3-4%. The retail sector is expected to remain resilient, with strong retail sales bolstered by the prospect of rate cuts, robust income growth and population growth. The office sector is likely to have passed its valuation trough, but operational challenges persist with high incentives and vacancy rates dampening effective rental growth. The residential sector stands to benefit from a combination of lower interest rates, strong focus on housing in the upcoming elections, strong employment and structural undersupply, which should lead to a pick-up in sales volumes and consumer sentiment.

We don’t expect the February reporting season to be a major positive catalyst. The 2-3 anticipated RBA rate cuts and gradual decline in 10-year bond yields should create a trough in earnings growth and NTAs for REITs, and present more inorganic growth opportunities, particularly for REITs with a competitive cost of capital.