SUMMARY
The A-REIT sector sold off -4.8% in March, underperforming the broader market by 1.5%. Growth and data centre exposed REITs were under pressure during the month (DGT -28.9%; GMG -9.2%; CHC -5.5%) as short term sentiment towards AI demand weakened globally.
In comparison, the Fund returned -5.2% and slightly underperformed the benchmark by -0.4%. The main detractors from performance were our overweight positions in Qualitas Limited (QAL -17.5%) and Ingenia Group (INA -5.8%). Both QAL and INA were the top performers the previous month, up +10.6% and +19.4%, respectively.
COMMENTARY
Uncertainty around US tariffs and their flow-on impacts for growth were an overhang for global markets this month. With continued volatility, we expect the REIT sector to hold up relatively well compared to the broader market with its defensive income streams and attractive valuations during the US tariff announcements.
We believe the direct effect of higher tariffs on REIT’s earnings is minimal, with limited to no exposure to global trade. Even for logistics assets, earnings are protected by long term leases (average of 4+ years) to multi-national corporations with strong lease covenants. We believe it’s the indirect effect from lower GDP growth and higher inflation that could be more material over the medium term.
Expectations for growth have been pared back materially, with market commentators now forecasting a recession in the US as their base case for 2025. In the event of heightened recession risk, REITs, with their contracted rent escalation mechanisms and lower operating leverage, are less impacted by global growth than their peers. We, therefore, expect the sector’s earnings and stock performance to hold up relatively well as a result.
With this in mind, we expect more dispersion of returns to occur between stocks within the sector, likely in favour of defensive quality companies with strong balance sheets and a proven track record to navigate a more challenging economic outlook.
Our focus on cash flow and balance sheet strength have resulted in the Fund being overweight to the residential sector with investments in Stockland (SGP), Mirvac (MGR), Cedar Woods (CWP) and Aspen (APZ), all of which will benefit from additional rate cuts forecast over the short-term along with structural undersupply and growing demand over the long-term.
We also invest outside the index, particularly in sectors driven by secular trends such as self-storage, data centres, real estate private credit and manufactured home estates (MHE) to provide further diversification and more sustainable earnings.
The Fund now has a strong long term track record, generating a 12.1% p.a. return for the past 5 years and +8.1% p.a. since inception, outperforming the benchmark by 3.8% p.a. over this period.