SGH Property Income Fund update – Q2 2025

SGH Property Income Fund update: A strong quarter driven by select AREIT performance and attractive valuations

In this quarterly fund update, Grant Berry, Lead Portfolio Manager of the SGH Property Income Fund, recaps Q2 2025 performance and positioning.
The fund benefited from solid contributions by GPT Group, Aspen Group, and Stockland. Bond yield movements and interest rate cuts also supported valuations.
Grant discusses portfolio adjustments, highlights key new holdings, and outlines why Australian property remains an attractive income-generating asset class.

 

Watch/Listen to the Q2 2025 SGH LaSalle Concentrated Global Property Fund update ⏬:

 

Transcript:

Q2 performance and interest rate trends

The June quarter saw the portfolio deliver a solid return. From the AREITs, we saw several March quarter updates, and they were very encouraging. Later in the quarter, as we approached June 30th, several of the AREITs provided valuation updates, which were also encouraging, as they neared the end of their financial year.

Moving across to the bond market and what we saw there, which is, of course, relevant for REITs in terms of how we think of REITs in a valuation context, 10-year nominal bonds rallied from about 4.4% to just under 4.2% over the quarter. While the 10-year inflation bond, which we refer to as real bond yields, rallied from 2.3% to 2.1%, and that is where we focused most of our attention. We saw the second interest rate cut, bringing the cash rate down now to 3.85%, and of course, we have expectations of further cuts from here. They’ll also be supportive of REITs in terms of their earnings trajectory as interest rate cuts take effect.

Key contributors and detractors

In terms of the drivers of performance over the quarter, they were from the GPT Group. That is our largest holding at the moment. Aspen Group, one of our smaller holdings, has had a stellar performance; in fact, its return over the last 12 months has been more than 100 per cent. And finally, Stockland is also a large contributor. While the detractors were overwhelmingly from one security being Dexus Property Group, and to a very small degree, Australian Unity Office Fund, which is essentially in a wind-up. And we’ve now exited our position there.

Moving on, firstly to the contributors: GPT Group. Now, this is a diversified group of very high quality. It also has a funds management arm to its business, and that has had a very positive trajectory. They established a retail partnership with Perron, implemented several new management mandates, and subsequently, formed a new $1 billion Australian logistics partnership, in which they made a 20% co-investment. That’s quite positive for the GPT Group.

Aspen Group and Stockland: smaller holdings with strong returns

Aspen Group, as I mentioned earlier, hosted an investor tour. They also undertook an expansion capital raising. Following this, it is a larger group, and it has brought more investors onto the register, which creates more turnover and liquidity. What is more likely now is index inclusion in terms of the major AREIT indices, and that is a potential positive as well.

Stockland Group, which I mentioned earlier, is a large, diversified group. Of course, many people know them for their residential part of the business, where they are Australia’s largest subdivider, or creator of communities. And they provided a March update, which showed very resilient residential demand. It did show some underperformance, I’d have to say, in the land lease communities. However, after working through all that, they reaffirmed their FFO guidance for FY25. And, of course, from a macro perspective, the most recent interest rate cut is also a positive development.

Key detractors

In terms of our detractors, our largest detractor was Dexus Property Group. They are primarily an office REIT. They have an industrial business and a funds management business. Now, the office markets are recovering from their lows, and we’re seeing some positive movement there. Their valuations for Dexus went up, and that’s not withstanding the capital rate expansion. So, we’re seeing some positive read-through there. However, what has weighed on Dexus over the quarter has been its funds management business, where, unfortunately, they’ve experienced a couple of unfortunate events. The main one is related to their investment being their client’s investments in an airport fund. And it’s a bit long to go into that, in terms of this audio recording. However, what we did there was reduce our position in Dexus Property Group.

After that, when we saw the opportunity, we took advantage of it to reinvest in the GPT Group, which has implemented positive initiatives in the funds management area. I mentioned earlier that it is a high-quality group with an attractive valuation.

Portfolio adjustments and new positions

Now, that moves us into the portfolio and its positioning, as well as any changes that may have occurred. First, I would like to mention that the SGH Property Income Fund focuses on investing in high-quality real estate at attractive valuations for income. As expected, there won’t be much change over a quarter; we’re investing for the medium to long term. We aim to have a well-diversified portfolio. We can’t have any individual holding above 15%, which is in significant contrast to the AREIT index itself, where one holding currently represents around 40% of that index.

What we’ve been doing with the portfolio is we’ve found with the market that a number of the larger REITs have been doing particularly well, they’ve been becoming more expensive, and we’ve been seeing that as an opportunity to, if you like, sell down out of some of those positions and reinvest into some of the smaller entities, which also has the benefit of investing in less economically sensitive sectors, more value and more diversification.

And where we’ve been doing that, for example, has been in Scentre Group and Vicinity Centres. I mentioned that in the last quarter. But we’ve continued with that. Additionally, during the quarter, we added to the GPT Group. I mentioned before about reducing on Dexus Property Group. That was one move to help increase our GPT Group’s positioning. We added to our position in GrowthPoint Australia. We introduced this in the portfolio in the previous quarter, and we continued to add to it. We’ve also added to Centuria Industrial.

New additions: Cromwell Group and liquidity opportunities

This quarter, we have added a new security to our portfolio, Cromwell Group. Now, this is a group that we’ve been watching for many years. It’s a group that has faced many challenges. It had a large funds management business primarily in Europe that was not doing well at all. It had a lot of gearing and a very poor balance sheet. Now, as you can imagine, given that it did have its challenges, its security price fell over that period.

However, what they’ve done is wind down their funds management business and effectively exit the European funds management business. This significantly reduced their leverage, such that their gearing is now actually below the sector’s gearing or in line with it. So that’s attractive. A good balance sheet there. And of course, with a security price coming down, there’s an attractive valuation. During the quarter, we found that a larger security holder was selling down its position, which created a liquidity event for us to enter at a discount. Hence, we have added to our portfolio, and we continued to do so.

Why invest in the SGH Property Income Fund

Putting this together, here are the reasons to invest in the SGH Property Income Fund. Firstly, I would say that Australian property is an attractive asset class in its own right, given our robust population growth, which is truly the envy of the world. Now, on top of that robust population growth, there’s a very limited supply. In Australia, we have very stringent planning. It is just harder to get things done and bring in new supply, but on top of that, construction costs have increased considerably in recent years, which makes the economics even more challenging. We’ve seen several REITs trading at discounts to the direct market.

And, what I mean by the direct market is you think of where a building, whether it’s an office building, a shopping centre, or an industrial building, even a house for that matter, is selling in the real world. That’s essentially valuations. Now, REITs are listed on the public market of the ASX, and they trade at discounts in many cases. And that’s attractive. The portfolio is well-positioned and resilient. We observed that, particularly during April, when the noise surrounding tariffs was at its peak, the equity market declined considerably. The AREIT sector also fell considerably, while this portfolio held up very well and actually continued to grow.

Attractive valuation, income yield, and resilience

The portfolio is trading at a discount of about 8% to its net tangible asset backing. That’s the value of its real estate. And if we use our lens to look through the cycle of real estate value, plus the value of businesses, which aren’t just bricks and mortar real estate, such as funds management, it’s about a 15% discount.

As I mentioned before, we’ve had interest rate cuts. We’ve had two so far, but we expect them to be more meaningful. If they materialise, that would provide an earnings tailwind going forward. And the valuation is also attractive. The portfolio is well diversified. It’s delivering a solid income yield. We have just completed June, and the income yield has been very solid. The valuations that we’re seeing from the REITs, which we will see more of through the reporting season, have been very positive.

Even in the office, which has its challenges, we’re seeing valuations stabilising in some cases, moving upwards. So, pulling all of that together, we feel quite constructive about the outlook for the portfolio from here.

Looking ahead: reporting season and medium-term outlook

In terms of our expectations for the next quarter. In a world where policy changes occur almost daily, just look at the recent developments with tariffs. You feel as if you’re just looking at that, you’re really jumping at shadows. That’s not how we invest. We’re not focused on the short term and the noise. We prefer to focus on the longer term, and ultimately, valuation is what matters. However, as we move into the next month, we are entering the reporting season, and what we expect to see there is not much change. We expect to see some evidence of solid or improving occupancy, which is a positive sign. The valuation movements have given us a little insight, and we expect to see more, which is likely to be a positive and more favourable interest rate environment. This should all be supportive through the medium term.

So, essentially, we’re looking for a medium-term outlook that is quite favourable for the portfolio from here.

 

*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/.