SGH Property Income Fund – Quarterly Update
December quarter 2023
Key drivers for the SGH Property Income Portfolio performance in the December quarter of 2023?
Last quarter was very strong for the AREITs sector and also, pleasingly, for our portfolio, which delivered a net return in the order of 17%. This followed a softer prior quarter.
In comparison to the broader equity market, the ASX 300 Accumulation Index was up 8.4% over the quarter. Global REITs delivered just under 13% for the quarter, so Australian REITs performed very well in that context.
What’s important here and that’s driving the performance is what’s happening in the bond market. Australian 10-year nominal bonds finished the quarter at 4%, while 10-year real bond yields, or inflation-linked bonds, finished the quarter at just under 1.4%. They both came down in the order of 50 basis points, and that’s very positive for the sector.
What’s driving that? Firstly, inflation figures. Inflation figures has been coming down a little bit more than expected, and that’s been a good thing. This has been further assisted by commentary coming out of the Federal Reserve in December, envisioning three rate cuts over the course of 2024 in the order of 25 basis points each, with the market actually building in even more in terms of rate cut expectations. Lower real bond yields, inflation-linked bond yields, are supportive for valuations. That’s a key metric that feeds into valuations. Lower interest rates are also positive for property, because that has the potential to drive positive earnings revisions for the sector.
In terms of our portfolio, the key positive contributors came from our largest holdings: Stockland, Vicinity Centres and Centre Group.
The only two detractors were Australian Unity Office Fund and HomeCo Daily Needs REIT, which we actually exited over the course of the quarter.
How is the portfolio positioned?
The SGH Property Income Fund is about investing in real property that is, durable assets, for rental income at attractive prices. Notwithstanding the strong rally that we did see in December, the portfolio still exhibits good value. It is trading at a 14% discount to its Net Tangible Asset (NTA) backing. It’s trading in the order of a 16% discount to our internally derived Net Asset Value (NAV), and that is using through-the-cycle capitalisation rates. If we were to use valuers capitalisation rates, then it would be traded in the order of a 20% discount to NAV. So the value is still there notwithstanding the rally.
How this position changed?
Our position is very steady. However, there have been incremental changes. One of them would be Charter Hall Retail, where we increased our position. We like that sub-sector – convenience retail. It’s attractive valuation, very defensive, and we’re also seeing assets transact, which supports the valuation in the direct market.
In fact, later in the quarter, Charter Hall Retail sold a couple of assets themselves, which was very supportive to that valuation thesis, as well as having the benefit of reducing their gearing and putting their balance sheet in a better position.
In terms of reducing positions, we exited HomeCo Daily Needs. Now, that is also retail, a sub-sector that we do like—that convenience retail aspect, which they have as well. But we saw better relative value elsewhere, being Charter Hall Retail. These are the couple of changes that we made over the quarter.
Why should investors look at the SGH Property Income Fund now?
Firstly, high-quality real property, durable assets, delivering income for investors.
Secondly, notwithstanding a strong rally that we had in December, the portfolio is still trading at attractive valuation metrics, as evident by the discount to Net Tangible Asset backing.
And thirdly, an active management approach in our portfolio construction in putting it all together for our clients.
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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.
