SGH Property Income Fund update – March Quarter 2026

SGH Property Income Fund update: March Quarter 2026

In this quarterly fund update, Grant Berry, Lead Portfolio Manager of the SGH Property Income Fund, recaps how the fund performed, and highlights where the fund increased stock weights including Dexus and Junior Group, plus Stockland and Mirvac.

 

Watch/Listen to the March quarter 2026 SGH LaSalle Concentrated Global Property Fund update ⏬:

Transcript:

March quarter performance

Welcome today to the SGH Property Income Fund, March 26th quarterly update.

Firstly, fund performance. It was a very challenging quarter, the March quarter. We saw a broad sell off across the markets. The fund delivered a negative 12.2% return over the March quarter. In doing so, it significantly outperformed the, AREIT 300 accumulation index was declined by 16.4%.

As I mentioned, while clearly a challenging quarter for listed property, I’m pleased that the fund provided meaningful relative outperformance through a period of significant market dislocation. In terms of the market environment, the March quarter was dominated by sharp rise in geopolitical risk and high bond yields.

As you’d be aware, the escalation of the Iran conflict alongside the temporary closure of the Strat of Hormuz, drove a spike in oil prices and inflation expectations leading to this broad base sell off. We focus our attention a lot on bond yields and bond yields move materially higher. In terms of real bond yields, they move to 2.6%, which is elevated in a post GFC context and a key driver of property valuation. Certainly, in the listed sector. As we’ve consistently highlighted, is a longer-term real yield rather than short term rates. And we did have a cash rate increase as well that had the greatest impact on AREIT pricing.

Now we’ve done a little bit of work here and we’ve looked at real bond yields, which are elevated 2.6%, and we see that limits a case for cap rate firming and suggests that in some cases it may be the potential for expansion. So, in this context, valuation discipline remains absolute paramount. And what that means for us is we continue to focus on acquiring quality assets at discounts to NTA, prioritizing balance sheet strength and capital management, and leaning towards value rather than growth consistent with our position prior to the quarter.

Now, the last time we saw nominal bond yields at around 5% was in 2011. June 2011 when they hit 5.2%. The reason why I say the 5% is that nominal bond yields rose just over 5% during the month of March, and at that time, back in 2011, real bond yields were at 2.6%, same as what they were in March. Now, if we go back to the portfolio and where it was trading at that time, the portfolio traded on an implied capitalization rate of 8.6%.

What that means is, in an unleveraged context, it’s like you’re buying these property assets on an 8.6% yield. Interestingly, subsequent to that, the portfolio delivered a five-year return of 17% per annum. I will say with a caveat there that the portfolio did finish up a bit expensive at the end of 2016.

So, as we sit here at the end of March, we’ve got nominal bond yields of 5% real bond yields of 2.6%, and the portfolio trading an imply capitalization rate of 8%, so broadly comparable to 2011. So while conditions remain volatile and uncertain, current valuation metrics appear favorable and are supportive of medium to long term potential.

The current SGH Property Income Fund position

Now, in February, we had reporting season. Of course that happened during the March quarter, so I just want to touch on it there. Probably the key thing that caught our attention was JP Morgan highlighted the consensus earnings provisions were stronger for the AREIT sector relative to the broader market, and this was supported by contracted rents interest rate, hedging, valuation resilience, and stable funds management platforms.

What we found was residential was a standout performer during reporting season with interest rate margin compression, helping to offset the impact at Verizon interest rates. That is in terms of the REITs balance sheets. So, we saw interest rates tick up, but the margins on their debt come down, which was pleasing.

It was also noted during reporting season that several AREIT CEOs indicated there would take two to three interest rate rises to materially impact consumer behaviour. Particularly in residential. Now with two rate rises in place alongside fuel prices escalating and uncertainty stemming in from the Iran conflict, this may begin to impact this sector.

As such, there is some risk of negative consensus earnings revisions for groups with exposure to residential development and potentially discretionary retail. However, balancing our expectation is for only modest increases in rates. The reason why we say that is inflation is materially below 2022 levels when it was very elevated, I remember it getting up to 7% and rates peaked last time, just 25 basis points above the current levels. In addition, the market has already moved very swiftly to discount those groups, and we’re starting to see attractive opportunities emerge as rates are likely to peak among the residential exposed names.

In terms of the portfolio commentary, given the significant and broad-based selloff during March, there were no absolute positive contributors to the portfolio. It was just. Too broad and deep. The key detractors were Dexus, Stockland, and GPT Group, and that’s primarily a function of the size of these groups within our portfolio.

So for example, Dexus, which is the largest office portfolio in the country, and a very high-quality office portfolio. In reporting their result, they announced an on-mark buyback program. So again, they’re seeing the value in their own stock and buying back securities. It’s a portfolio’s largest holding, and it was the largest attractor over the quarter amid that broad base sell off, even though it marginally outperformed the sector. Stockland, which is a diversified group, a big part of its business is residential land development. It delivered a steady result with improving residential momentum and resilient reoccurring income across its logistics and town centers development margins and guidance for broadly in line with expectations how again, the broad market selloff, coupled with the recent increase in interest rates and the prospect of further rises weighed on Stockland security price over the quarter.

And finally, GPT Group, another large, diversified group, it reported a solid FYI 25 result with their funds from operation up 5.5%. Driven by strong, like for like net property income growth is 6.3% across their portfolio of retail office and logistics. However, this was overshadowed again by the broad market sell off, and whilst it preferred broadly in line with the sector over the quarter as one of the portfolio’s largest holdings, it was also one of the largest detractors.

In terms of the portfolio position and outlook, the portfolio remains well diversified with a tilt towards convenience, retail and office assets similar to where we started the quarter. We continue to see attractive opportunities in smaller and mid cap AREITs where fundamentals are strong and valuations remain appealing. At the portfolio level the fund is trying a material discount to net tangible asset. And our assessment of net asset value within implied capitalization rate, as I mentioned earlier, at 8%, which is historically very attractive. During the quarter we’re quite active, repositioning the portfolio to take advantage of this market weakness.

And what we did was increase our weights in Dexus, which I mentioned earlier in Junior Group, which actually wasn’t in our portfolio going back a few quarters ago. We’ve introduced into our portfolio, and we’ve continued to add there. And Stockland, Mirvac, as I mentioned before, the residential names reported very good results. However, they’ve sold off very significantly. And if I just put it in context, Stockland at its high was $6. 75. It’s now around $4. So that’s a very significant sell off and hence why we’ve been adding there. These changes reflect our conviction in valuation support and medium-term fundamentals, particularly across office and residential linked exposure where pricing has materially adjusted.

What we’ve been doing on the other side is we’ve reducing our positions in Scentre Group and Vicinity centres. We like them. They’re very high-quality destination malls, essentially. Vicinity also has factory outlets as well as s smaller assets and CBD assets, but we just don’t see as much value there.

And, the way the stock is behaving, particularly Vicinity centres, is behaving as if the world hasn’t changed and rising interest rates and fuel prices will affect the consumer there as well. So we’ve taken that opportunity to weigh down there and then move into the stocks which have been hit and, bear in mind that is in the context of this portfolio significantly outperforming the sector over the quarter. So what we’ve been doing essentially is moving from the defense to positioning ourselves to the offense coming out of this out of this cycle. We exited Aspen Group. That’s a great group, but this is, this stock has gone up over a hundred percent over the last year or so, and we’ve reallocated that capital towards high conviction opportunities and probably single out in junior communities, which is in some ways similar.

But that’s the stock that’s come back significantly and we see good value there. So overall activity during the quarter reflects our value orientated approach. Lending in dislocation, maintain a focus on quality, income, durability. And just on that income durability, I’ll highlight that the 12-month distribution yield for the past year, this is to the end of March, is 6.5%, and historically this has been over 5% per annum.

Why invest in the SGH Property Income Fund

So, wrapping up in closing remarks, I’d like to say that we have got near term volatility and that may persist. And we believe the current environment presents compelling long-term opportunities. The key reasons to invest in this fund is the portfolio’s trading a significant discount to the underlying assets.

If you went out and bought these assets in the open market, you just wouldn’t get them on the pricing where it is in the public markets. And that’s an opportunity. It’s an attractive income yield. It’s been delivering north of 5% per annum. Exceeded that last year. Our forecast is in excess of 5% going forward, and that’s supported by contractor rent cash flows.

It’s essentially high-quality real estate with strong balance sheets and that’s how I buy a number of our REITs buying back securities. We actually had a couple of REITs, three REITs start buybacks over the quarter. In our portfolio. We have a disciplined valuation led approach, and that’s held us in wood stead through this dislocation.

It’s disappointing that, the returns have been negative over the quarter, but having said that, it has been a period of very significant dislocation, and we’ve been held able to hold up significantly better than the sector itself. So importantly, the current valuation settings, particularly with rural yields at elevated levels.

And we have to go back to it just after the GFC have historically delivered strong medium-term returns. And I think that sets us up really well for the portfolio going forward. So that’s it for the update. Thanks for your continued support and interest in the SGH Property Income Fund. As always, please reach out if you’d like to discuss the fund, the portfolio, or outlook in more detail.

Thank you.

*The text has been edited for clarity.

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Disclaimer

This fund update has been prepared by SG Hiscock & Company (SGH) to provide general information only and is not intended to take the place of professional advice. It does not take into account the investment objectives, financial situation or particular needs of any particular person.

Equity Trustees is the responsible entity for the SGH Property Income Fund. Neither SGH, Equity Trustees nor any of its related parties provide any warranty of accuracy. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product. Follow the link for the full disclaimer: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.