SGH Property Income Fund update – September Quarter 2026

SGH Property Income Fund update: September Quarter 2026

In this quarterly fund update, Grant Berry, Lead Portfolio Manager of the SGH Property Income Fund, discusses the impact of rising bond yields on listed property securities, key portfolio performance drivers and emerging opportunities across the A-REIT sector. He explores improving property fundamentals, attractive valuations and the Fund’s selective positioning, highlighting why the team continues to see opportunities in quality property assets trading at significant discounts to their underlying value.

 

Watch/Listen to the September Quarter 2026 SGH Property Income Fund update ⏬:

Transcript:

September quarter performance

The fund returned -1% in the September quarter. Although it fell short of our CPI plus 3% benchmark of 1.8%, it significantly outperformed the A-REIT 300 accumulation index, which climbed 8.4%.

Although the absolute return was modestly negative, the fund’s relative outperformance of about 7% was pleasing, especially given the significant rise in bond yields and renewed volatility across listed property securities. Two key themes dominated the quarter. First, the August reporting season was generally encouraging operationally.

Second, interest rates and bond yields rose further, weighing heavily on property security valuations. In terms of the market environment, during the quarter we saw the 10-year nominal bond yield rise from 4.7 to 5.4%, while real bond yields rose from 2.4% to nearly 3%, finishing at 2.9% at the end of the quarter.

You saw the RBA deliver its fourth interest rate rise, taking the cash rate to 4.6%. However, as we’ve consistently highlighted, short-term cash rates don’t matter for valuation; long-term bond yields do, and rising real bond yields weighed on property securities.

Now, moving on to reporting season. As I mentioned earlier, the reporting season was broadly encouraging. In fact, UBS data showed consensus earnings revisions were down only about 1%, which was a relatively solid outcome given the rise in interest rates.

So really, the security price reactions that we saw were more a function of economic evaluations and investors’ positioning than underlying earnings performance. What we’re seeing from office is that we’re actually seeing very encouraging signs. We’re seeing steady occupancy. We’re actually seeing some increase in income growth.

We’re seeing that in the JLL stats, and it’s coming through after the quarter. That said, we are seeing elevated leasing incentives. Landlords pay those to retain tenants or entice them into their buildings. That said, the property securities are at significant discounts.

We’re seeing them way below where assets are actually transacting in the direct market and below replacement costs, and that’s the real attraction there. For retail property, the operating fundamentals are very sound. Occupancy is very high. In fact, in many cases, leasing spreads are at record highs and very solid.

And we’re seeing a lot of resilience there, supported by stable consumer spending, so that’s positive. That said, we think retail property is pretty much as good as it gets from an operating perspective, and we’ve been more underexposed in that subsector.

Residential development and land lease communities were very interesting. Expectations were subdued coming into reporting season, and settlements and operating performance exceeded them. And finally, industrial property: the fundamentals are sound. We’re seeing more subdued rental growth, but we’re still seeing rental growth and certainly good re-leasing spreads, but we’re seeing rising incentives in some sub-markets.

Moving on to data centres, they’re important because they’re a big part of the AREIT index, but they’re a relatively small exposure in our portfolio. While it offers growth opportunities, the scale of the proposed developments introduces considerable leasing, funding, and execution risk. And we remain very conscious of those risks where valuations already incorporate significant future growth expectations. We have a more cautious positioning there.

What we’re seeing, which is very encouraging, is property transactions. We’re seeing quite a few property transactions.  We saw GPT buy an asset in Brisbane. We’ve seen Charter Hall come out with a $1.2 billion industrial partnership. We just continue to see more and more property transactions, so that’s very supportive. But we’re still seeing AREITs trading at very meaningful discounts, and what we’re seeing coming through post-results is more buybacks coming into the equation.

So, for example, Mirvac have just introduced a buyback. Dexus put their buyback back on. So we’re seeing more of that. We’re also seeing mergers and acquisitions activity start to emerge. The most recent is Warburg Pincus, which has made three approaches to Ingenia Communities, with the latest a $5.25 per security cash bid.

So we’re seeing more of that start to emerge, and that’s recognising the discount connects in terms of pricing and therefore the opportunity in the AREIT sector.

Key drivers of performance for the SGH Property Income Fund

Our key contributors over the quarter were Dexus, Ingenia Communities, and Mirvac.

First, on Dexus, I mentioned the office subsector; we’re seeing improving fundamentals there, and their recommencement of buybacks has been positive.

Ingenia returned 11% over the quarter. That’s mainly due to the M&A play I mentioned earlier: the latest offer of $5.25 per security drove the stock up 11% over the quarter.

Mirvac returned 8% over the quarter. They delivered a solid 7% growth in operating profit, driven by improved settlements, lower gearing, and the start of an on-market buyback.

The main detractor this quarter was Arena REIT. Arena REIT is a childcare REIT. They had an issue with one large tenant, Edge Early Learning, which accounted for about 14% of their portfolio, running into financial difficulties. That said, the security price came back significantly, and we believe it was an overreaction. In fact, we bought securities on that.

Growthpoint was another one that detracted from our performance. They saw encouraging office leasing. They have a predominantly office portfolio, but the main concerns are elevated gearing, and they initiated their distribution reinvestment scheme, which we don’t favour given the significant discount to NTA, because it would cause dilution.

And finally, Waypoint REIT, that’s a service station REIT. Operationally, their result was fine. It was, in fact, a half-year result. It was more a function of the rising bond yields. So overall, the portfolio’s relative resilience reflects our valuation discipline and selective positioning across the sector.

The current SGH Property Income Fund position

In terms of portfolio positioning and any changes, our process and philosophy remain unchanged. We continue to favour property securities that offer attractive discounts to our assessment of intrinsic value, supported by sustainable cash flows and pushing out good distribution yields.

So at the end of September, the portfolio was trading at around a 30% discount to our assessment of net asset value, and an implied capitalisation rate of 8.7%, which is the highest we’ve seen for some time, compared to approximately 5.8% for the broader AREIT sector. So to us, that’s really encouraging.

In fact, the portfolio offers an estimated distribution yield after fees of around 6%. We’ve been selectively repositioning the portfolio through this volatility. We continue to have a very sizable exposure to the office subsector. That’s somewhat contrarian, but we think it’s too hard to ignore.

There’s a lot of value there. We’re seeing the pricing and assets, in fact, in the direct market trading below replacement costs. We’re seeing improving fundamentals. We’re seeing rental growth, and it’s hard to ignore. So we’ve got a very healthy exposure there. We also selected smaller REITS and other property securities.

Again, we’re seeing a lot of discounts. I mentioned Arena REIT, which we picked up. We put Centuria Group in the portfolio over the quarter. We also added Centuria Industrial Properties to the portfolio over the quarter. So we’re seeing opportunities in some of the smaller REITS. Conversely, we remain cautious on parts of the fund management subsector, where valuations don’t always reflect the business risk.

And so we remain a bit more cautious here and underexposed. Certainly, if you compare this to an index positioning. Our focus remains on asset quality, balance sheet resilience, sustainable cash flows, and, importantly, distribution yield and expected long-term returns.

Why invest in the SGH Property Income Fund

So, in terms of the outlook and the three key investment takeaways, what I want to leave you with is that the three takeaways are, firstly, valuation.

The portfolio is trading around a 30% discount to our assessment of net asset value, and an 8.7% implied capitalisation rate is very favourable in our view. It’s very elevated relative to history.

Secondly, income and operating fundamentals, I mentioned reporting season. The operating fundamentals are sound. Income from the portfolio is very supportive.

And thirdly, a disciplined investment approach. We don’t sit here idle. Our philosophy remains unchanged, but we’re constantly looking for opportunities, and we’re seeing this volatility create opportunities. But our focus remains on quality assets, attractive valuations, and expected total returns.

So thank you for your continued support and interest in the SGH Property Income Fund.

As always, please don’t hesitate to contact us if you’d like to discuss the fund, the portfolio, or our outlook in more detail.

*The text has been edited for clarity.

For more information about the SGH Property Income Fund, click HERE. Follow us on LinkedIn.

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Disclaimer

This fund update has been prepared by SGHiscock Investment Management (SGHiscock) 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 SGHiscock, 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/.