
GREITs: A Market Reversal and Investment Opportunities
December quarter 2024, Matt Sgrizzi, portfolio manager for SGH LaSalle Concentrated Global Property Fund
Market Reversal and Recent Trends*
The global capital markets experienced a big reversal between the last two quarters. After flying high previously, REITs sold off last week. Aggressive Fed rate cuts and US election results bolstered the outlook for the US economy and sent long-term interest rates higher. This weighed on REITs, particularly those outside the US, after they performed strongly in the previous quarter.
Fund Performance and Outperformance
Our fund’s rally slowed, resulting in a modest decline over the two periods. Despite this, the fund’s trailing one-year return stands at 5%, more than 200 basis points better than its benchmark. This marks five consecutive calendar years of outperformance for the fund, with about 650 basis points of annualised outperformance—an excellent achievement.
Portfolio Positioning and Opportunities
The portfolio is selectively positioned to invest in the best real estate opportunities we see. Lately, these opportunities have been across a broad range of real estate investment companies. Some of our largest overweight positions are in non-traditional property types, including cell towers, billboards, cold storage, triple-net lease properties, data centres, and manufactured homes. These areas benefit from the key advantages of real estate ownership: differentiated, structurally attractive growth profiles, and especially attractive risk-adjusted returns.
Global Exposure and Value in Europe and Japan
We also have meaningful exposure to REITs in Europe and Japan—markets that have lagged, especially as investors have gone “all-in” on the US. While US policy changes are driving growth and inflation higher, we think the risks are more balanced globally. In particular, we see exceptional relative value in European markets.
Portfolio Metrics and Valuation
Just to provide some high-level portfolio details: the fund holds 18 stocks, offering an attractive dividend yield of 4.2%. It boasts strong forecasted growth of 3.7% per year over the next four years, modest leverage with 34% liabilities-to-assets, and a significant discount to private market values, with an NAV discount of 19%.
Additionally, the portfolio trades at a large discount (13%) to our primary valuation metric—intrinsic value, derived from a capital market-based discounted cash flow model. We underwrite an attractive 17% annualised return for the portfolio over a three-year hold, reflecting high inflows, yields, and growth from the companies we own.
On key valuation metrics such as intrinsic value and expected return, the portfolio is far more attractive than the broader universe of global REITs, as represented by the FTSE Nareit Global Index. Approximately 55% of the portfolio is invested in the US, with continental Europe and the UK making up nearly 30% combined. The portfolio is also well-diversified across unique property sectors.
Diversification and Strategic Moves
Another significant development was the acquisition of one of our portfolio companies, ROIC (a shopping centre REIT), by Blackstone. Blackstone acquired two US REITs last calendar year at material premiums to their stock prices, and we held meaningful positions in both companies. As the largest real estate investor in the world, Blackstone shares the same value thesis we see in REITs, particularly the ones we own in our portfolio.
We also added a new retail position in Europe to the portfolio, capitalising on recent weakness in performance. At the same time, we swapped our US residential exposure from single-family homes to manufactured homes and gateway-city apartments. While our single-family home position served us well over many years, we now see a decelerating operating environment for that sector. This stands in contrast to urban apartments, where there has been very limited new supply in recent years.
Manufactured Homes: A Growing Opportunity
The manufactured home sector (or trailer park sector) offers affordable housing options, tremendous growth potential, and favorable fundamentals. A leading company in this sector experienced a significant decline over the past year, but we view recent management changes as an opportunity to acquire high-quality real estate at great value.
Outlook for REITs and Real Estate Fundamentals
Looking ahead, the dynamics that have driven strong returns for REITs lately are set to continue.
Attractive Valuations
REITs remain under-owned and trade at undemanding valuation levels compared to equities. The global trend toward disinflation is strong, giving investors another chance to buy real estate assets at attractive prices.
Solid Fundamentals
Second, the outlook for real estate fundamentals is quite solid. This is underpinned by several dynamic real estate sectors that enjoy strong pricing power and limited or declining levels of competitive supply. REITs also maintain very strong capital positions, enabling them to grow their market share relative to private owners who are facing pressure.
Proven Track Record
Third, our fund’s track record has been exceptional. As shown in the chart, we have demonstrated our ability to outperform in both up and down markets, even over challenging periods. This success stems from an unrelenting focus on investing only in the best opportunities we see in global markets.
We remain confident in our ability to help investors navigate global capital markets while delivering the many benefits of investing in liquid real estate portfolios.
Click here to find out more about the fund.
*The text has been edited for clarity.
The document contains general information only. Reference to either individual securities or other investments should not be considered as investment advice. We strongly encourage you to obtain professional advice before making an investment in securities that have been mentioned. Documents you should consider prior to making an investment could include the relevant Product Disclosure Statement and the accompanying Target Market Determination. If you would like further information on financial products that SG Hiscock & Company Ltd (AFSL 240679) is the investment manager for, contact the Client Services team on 1300 133 451, visit the website www.sghiscock.com.au or contact your financial adviser. Any investment is subject to risk, including possible loss of income or capital invested.