SUMMARY
The S&P/ASX 300 Property Accumulation index returned 2.0% in December, outperforming the broader equities market, which returned 1.4%. In comparison, the Fund returned 0.7%, underperforming the benchmark by 1.3%. Key detractors for the month included our overweight position in Next DC (NXT -7.66%), Centuria Group (CNI -6.68%) and Cedar Woods (CWP -3.82%).
For the 12 months to December 2025, the Fund returned 10.2% compared to the benchmark, which returned 9.7%, for an outperformance of 0.5%. Key contributors to outperformance have been consistent throughout the year, driven by our allocations to non-index stocks, including Cedar Woods (CWP +62.56%), Aspen Group (APZ +69.26%), and Qualitas Limited (QAL +35.14%).
Periods of market uncertainty often create compelling opportunities. In listed property, attractive valuations and improving fundamentals are creating a favourable entry point for investors seeking income, diversification, and long-term growth.
Despite rates likely remaining higher for longer, A-REITs can deliver strong performance in such environments. For example, the A-REIT index returned 30.57%, and the Fund delivered 31.19% during the last cycle, which was dominated by 13 rate hikes. Supported by disciplined capital management and a high-conviction, free-cash-flow-driven approach, the Fund remains well positioned across market conditions.
To support existing investors considering increasing their exposure, Pengana will cover the buy-spread on investments in the Pengana High Conviction Property Securities Fund made before 31 January 2026.
If you wish to take up the offer, please reach out to client services on +61 2 8524 9900 or at clientservice@pengana.com.
COMMENTARY
After two years of strong performance, data centre exposures pulled back in 2025 as investors questioned capital intensity and returns from the global AI build-out (GMG –12.3%, NXT –16.9%, DGT –34.6%). In contrast, retail A-REITs were clear winners. Resilient operating metrics, favourable supply-demand dynamics and an improving consumer backdrop drove a subsector total return of 27.8%, with every retail REIT in the A-REIT 300 outperforming both the property index and the broader market.
Fund managers also delivered strong returns as transaction activity picked up alongside lower interest rates (CHC +74.3%, CNI +20.3%). Residential exposures performed well, led by SGP (+25.1%), MGR (+14.1%) and INA (+14.8%), although momentum softened late in the year as cash-rate expectations adjusted. Industrial returns were weighed down by GMG (–12.3%), despite generally sound – though moderating – subsector fundamentals (CIP +23.6%). Office sector performance continued to improve, delivering a return of +11.7% (versus –7.3% in 2024) as the recovery gained traction, although it remains relatively subdued compared with the broader sector.
2026 is likely to be a year of contrasting share price drivers. On the one hand, the prospect of interest rate hikes presents valuation risks for Australian property stocks. On the other hand, underlying fundamentals remain strong, with robust population growth continuing to drive demand across multiple property segments. Limited supply across several sub-sectors is creating a favourable supply-demand imbalance, supporting net property income growth and attracting both domestic and global capital, which in turn underpins cap rates. We expect a relatively strong reporting season in February and through 2026, and would look to take advantage of valuation opportunities that may arise from any interest-rate-driven market volatility.
Our top picks continue to focus on sectors with robust fundamentals. In our view, the most attractive demand–supply dynamics are in retail and residential/manufactured housing, where supply remains well below the growing demand driven by population growth. We also remain positive on the strong global demand for data centres and expect significant positive catalysts for GMG in 2026.
The market is also likely to start turning its attention toward 2027 guidance. Although rising bond yields and interest rates may increase funding costs, we expect robust underlying earnings growth to help offset these pressures. Our emphasis on free cash flow, strong balance sheets, and selecting best-in-class names positions us well for the year ahead.