What to expect leading up to FY24 results

The Fund returned +2.25% for the month. In comparison A-REITs delivered a +1.91% return in May, outperforming the broader equities market by +1.01%.

On a rolling year-to-date, the Fund is tracking at 26.72% return, outperforming the benchmark by +3.34%.  The Fund’s outperformance is attributed to our active strategy of being benchmark unaware and not investing in pure office REITs, whilst leveraging into sectors with exposure to secular trends of AI and cloud computing such as data centres through our holdings in NextDC (NXT +41.55%) and Goodman Group (GMG +73.06%).

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.

HomeCo Daily Needs REIT

Australia

Real Estate

HomeCo Daily Needs REIT operates as a real estate investment trust. The Company invests in and manages portfolio of retail assets.

National Storage REIT

Australia

Real Estate

National Storage REIT engages in providing self-storage and tailoring self-storage solutions to residential and commercial customers. It offers spans self-storage, business storage, records management, climate-controlled wine storage, vehicle storage, vehicle and trailer hire, packaging, insurance and other value-added services. The company was founded in December 2013 and is headquartered in Brisbane, Australia.

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.

The recent March 2024 quarterly updates showed 1) retail metrics normalising as leasing spreads pulled back from +5% to +2.5%; 2) Residential sales slowly improving, however settlements are heavily skewed to the last quarter of the financial year; 3) office fundamentals remaining a slow grind; and 4) industrial rental growth moderating from its peak of +40% to +20%.

Putting all this together, our view heading into this reporting season is one of cautious optimism.  We believe that rates have peaked and whilst the exact timing of rate cuts is unknown, REITs are well positioned to take advantage of the turnaround in the rate cycle with attractive valuations and, for the majority, sound balance sheets with the average sector gearing at 27%.

In terms of office valuations, all eyes will be on the sale of several A-grade CBD office towers, namely 231 Elizabeth Street (Sydney), 333 George Street (Sydney), 200 Queen Street (Melbourne), 5 Martin Place (Sydney) and 175 Pitt Street (Sydney).  This is seen as positive for the sector as it provides transactional evidence and hence price discovery and valuation.  The key risk is that there will be further devaluations, which will exacerbate already high leverage levels in some of the more passive REITs.  As a result, we remain cautious about the recovery of the office sector until we have more visibility on capital demand for these assets.  Our strategy continues to support REITs with high visibility in earnings and strong balance sheets to support earnings growth through developments and acquisitions.