Thinking of allocating to AREITs? Now is the time

• A-REITs delivered a +6.76% return for July, outperforming the broader equities market by +2.63% following a subdued June core CPI print which pared back interest rate expectations and bond yields.
• In comparison, the Fund returned +5.49% underperforming the benchmark by 1.27%.
• Key contributors to performance include our overweight positions to Stockland Group (SGP +10.31%) and Ingenia Communities Group (INA +9.83%) whilst detractors include our investments in NextDC Limited (NXT -4.99%) and Qualitas Limited (QAL +1.69%).

Some thought pieces from our investment team

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.

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.

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.

After a sustained period of falling cash rates and a low interest rate environment, the rapid rise in inflation and spiking interest rates over 2022 to 2023 had a significant impact on the performance of REITs globally. REITs were hit with a myriad of issues from rising construction costs, exacerbated by supply chain disruptions and labour shortages, to high costs of capital, which eroded earnings and constrained growth.

As the cycle turns and we move into a more stable rate environment with the expectation of cuts later this year and next, sentiment towards the sector should become more positive in terms of earnings and valuations.

Investors looking at the sector may think they have missed the boat, with A-REITs having delivered strong returns of +23.79% in the 2024 financial year and up +6.76% over the past month.  Despite an easing cash rate cycle having already commenced in Canada, New Zealand, and Europe, the US Fed and the RBA have not yet cut rates. This suggests there is some further upside to come.

Looking at the relationship of how REITs perform over the past 20 years, the sector has a history of negative correlation to bond yields and interest rates, benefiting from both the plateau at the top of the interest rate cycle as well as the commencement of interest rate declines. The analysis also suggests REITs’ outperformance starts around 4 months before the first RBA rate cuts.

Transaction market activity and reported asset revaluations are at 20% to 25% discounts from their peak levels. We believe downside risk to valuation is limited from here, particularly for retail and industrial assets. However, as cost of capital remains relatively high, we are selective in our investments and prefer REITs with strong balance sheets and access to third party capital to capture growth opportunities either through acquisitions or developments.