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High Conviction Property Securities Fund

Australia's only high conviction A-REIT fund with an ESG focus

March 2021 - Monthly REPORT

The housing boom - and how to get exposure via REITs

SUMMARY

The REITs sector rebounded strongly in March, up 6.3% as bond yields stabilized, and the RBA’s commitment to keep rates close to zero until at least 2024.

The Fund generated a return of 6.0% for the month. The main contributors relative to the REITs sector were Centuria Industrial (CIP), Charter Hall Group (CHC) and Dexus Group (DXS), whilst NextDC (NXT) and Cedar Woods (CWP) detracted from performance.

 

PORTFOLIO

Top Holdings (alphabetically)

Charter Hall Group Australia Diversified REITs Charter Hall Social Infrastructure REIT Australia Specialized REITs Dexus Australia Office REITs Goodman Group Australia Industrial REITs Mirvac Group Property Trust Australia Diversified REITs

Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 Mar 20211
1 Month1 YearSINCE INCEPTION2
Fund 6.0%33.7%11.5%
Benchmark 6.3%45.4%-5.3%
1 Month1 YearSINCE INCEPTION2
Fund
6.0%
33.7%
11.5%
Benchmark
6.3%
45.4%
-5.3%

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

One of the key focuses during the month was the strength of the residential market.  What a difference six months has made!  Back in September 2020, market commentaries were around a potential decline of 10%-15% in Australian house prices as the high unemployment rate, the collapse in immigration, and the depressed rental market all pointed to weaker demand and increased forced sales.  The picture made even worse as Job Keeper, increased Job Seeker, and Bank payment holidays started to wind down in December 2020, before ending in March 2021.

Today, six months later, every newspaper headline points to a housing boom: with clearance rates of over 80% in most capital cities, and price increases of +8% since the September trough, making it the strongest recovery in 33 years (according to CoreLogic).

So what had contributed to this turnaround (and even surge) in the residential market?

  • Historically low-interest rates, with RBA forward guidance that rates are unlikely to rise until at least 2024
  • Low mortgage rates, including 2 to 3 year fixed mortgage rates below 2%, making it cheaper to buy than rent in some regional areas
  • Higher savings rates due to COVID spending restrictions provided larger deposits available for housing purchases
  • FOMO – fear of missing out, heightened by low listings

Since the rollout of numerous effective vaccines here in Australia, and globally, the market is universally in recovery mode from the pandemic-induced recession, and it is not surprising that housing (being the most interest-sensitive sector in the economy) leads the recovery.

Unlike previous housing cycles, this time around it is not just in the two largest cities (Sydney and Melbourne) but nationally, particularly in regional areas.

This is driven by two unique features of this pandemic;

  • the work-from-home thematic has increased the desire for more space, and less reliance to be close to the workplace is driving demand for detached housing, particularly outside major cities
  • a historic amount of stimulus that has strengthened household income despite sharply rising unemployment.

Will the growth be sustained?

Based on the feedback from developers since the result, sales are expected to pull back after a surge in the first half of FY21 as various stimulus (particularly Home Builder Grant) were being wound back.  However, the sales trend is expected to remain strong as the strength in established homes is helping confidence and investors have begun to return to the market.

The demand moving forward will depend on affordability and access to loans.  As house prices surged over recent months, there has been increased pressure on regulators to intervene. As reiterated by  RBA Governor Lowe that “the RBA does not target housing prices, nor would it make sense to do so” and that there are “various tools, other than higher interest rates” to address concerns about rising housing prices, ie. Macro-Prudential Regulation.

Overall, we remain positive on the outlook of the residential sector with near-term risk of the return of macro-prudential lending rules in late 2021/2022 to slow the pace of credit growth.  Further ahead, we see the return of immigration could further support rental growth and newly-constructed properties in the medium term.

So how are we positioned?

Our exposure in the residential sector is via Cedar Woods (CWP) and Mirvac Group (MGR).

Cedar Woods has one of the largest development pipeline of 9000+ lots across 30 projects in VIC, WA, SA, and QLD.  The group focuses on residential land and townhouses across different price points, with the majority of their products eligible for government grants.  The key drivers include high presale at $380m providing solid visibility for earnings recovery to continue into FY22/23, coupled with a strong balance sheet to take advantage of pipeline acquisitions to support ongoing growth.

Mirvac, who are more limited to FHB, have not benefitted as much from the recent government stimulus.  However, the group’s ‘brought forward development pipeline such as Green Square, Willoughby, Waverley, and Tullamore, have provided confidence in future earnings, particularly as immigration returns.

With the fund’s focus on ESG factors, we are naturally attracted to developers who provide affordable housing.  This includes Ingenia Group (INA) and Lifestyle Communities (LIC) in retirement living and the built-to-rent sector which Mirvac is offering.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
15
MAXIMUM DRAW DOWN
-15.8%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 1.1088
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 6m
  • STRATEGY INCEPTION DATE 11 March 2020
  • BenchmarkS&P/ASX 300 A-REIT Total Return Index

Fund Managers

Amy Pham

Portfolio Manager

Jade Ong

Investment Specialist

Description

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.

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1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. The Fund incepted on March 11th 2020.  Index performance calculations include a complete month’s performance for March 2020.  No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. 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.