SGH Property Income Fund – June Quarterly Update
June quarter 2024, Grant Berry
Key market drivers for SGH Property Income Fund*
It was a relatively weak quarter for the property sector. We saw bond yields and we focused our attention on real bond yields, lifted from about 1.5% at the start of the quarter to 1.85%. This is one of the valuation metrics that feed into how the market assesses valuations. That seemed to play out more into traditional rent-collecting REITs, while the fund managers, in particular Goodman Group, Home Co, and Qualitas performed better.
In terms of our portfolio, SGH Property Income Fund, the key contributors came from our smaller holdings, being also smaller entities themselves: Australian Unity Office Fund, Aspen Group, and Peet Limited. While the key detractors came from our larger holdings and larger groups, which were Vicinity Centres, Stockland, and Charter Hall Retail.
The SGH Property Income Fund is about investing in quality real estate for income. In terms of our positioning, our largest holding is 12% of the total portfolio. This contrasts to the AREIT sector where one holding, Goodman Group, represents about 40% of the respective indices. Goodman Group itself is providing an income yield of less than 1%.
So, in terms of the makeup of our portfolio and our objectives, we differ markedly from the property indices as we drive for income yield.
Over the quarter, a number of AREITs came out with valuation updates. We thought we’d look into those valuations and just see what’s driving those valuations. There can be a couple of components to that, one being capitalisation rates, or think of a multiple. That is how the capital markets assess property. For example, if property was yielding 5.5%, or its capitalisation rate was 5.5% at the last valuation, and it is now reevaluated by the valuer at the next valuation at 6%. Then effectively, that 5.5 percent divided by 6 percent would represent about an 8% decline in value.
What we actually found over the quarter, is for industrial valuations and for retail valuations, the valuation decline was less than what the capitalisation rate expansion was. What that suggests is that the assumptions feeding into the valuation – rental growth, capital expenditure, lease-up allowance, etc., are broadly supportive. We found that with two of the three office REITs that reported valuations, Centuria Office and Growth Point, we found some positive drivers. While with Dexus, there is a slight negative impact from the assumptions feeding through into the valuations.
To put it all together broadly, there are supportive assumptions feeding into the valuations and we’ll get more into this as we go through reporting season.
Portfolio positioning
In terms of portfolio positioning, we have been implementing incremental changes over the quarter. The two entities where we increased our position are GPT Group and Charter Hall Social Infrastructure. Interestingly, these are two groups where we had been previously reducing our position. They have underperformed and the valuations became more supportive.
And there is more to it. GPT Group have made a new appointment, Russell Proutt, as an incoming CEO. He came across from Charter Hall Group, where he was the CFO. We see that as a really positive appointment, and he will drive good change through that group.
Charter Hall Social Infrastructure is investing primarily in childcare centres, a space that we really like, and now has a more attractive valuation, with a good income yield.
In terms of where we have been reducing our position, we’ve been reducing our position slightly in Scentre Group, Stockland, and Ingenia Communities.
Ingenia Communities, we see their current valuation as less attractive. They’ve actually got a new CEO coming in as well. Their recent market update was supportive, but we just see the valuation as less attractive given the stronger relative performance.
While Stockland, they are proceeding with the acquisition of Lendlease Communities, and that looks like it’s going to be a little bit more elongated process. Also the interest rate environment now is not as constructive as what we thought previously and as a result, we’ve dialled back our position.
Scentre Group has also performed relatively well, so we’ve seen an opportunity to recycle into GPT Group and Charter Hall Social Infrastructure, as I mentioned.
Why invest in SGH Property Income Fund?
The SGH Property Income Fund is about investing in quality real estate at attractive valuations, underpinned by rent for property income for our investors.
In terms of the valuations, we see them currently as attractive. The valuations of the assets themselves have been marked down over the last 18 months or so, and the portfolio is trading broadly at about a 20% discount to net tangible asset (NTA) backing.
Our portfolio construction and our objective vs. the index are quite different. The index has 40% invested in one single entity at the moment, while our largest individual holding is 12% of the fund. We are very much motivated to deliver our income objectives for our investors and providing a diversified portfolio.
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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.
