Monthly Update: Why REITs, why now, why us
Listed property had a volatile start to the year. Portfolio Manager Amy Pham explains why she sees that as an opportunity, and where the fund is positioned to take advantage.
April reinforced the market’s growing recognition that the global macro backdrop has shifted. Elevated geopolitical risk now appears structurally embedded, driving volatility across asset classes through its impact on energy prices, inflation expectations and capital flows.
For REITs, the initial shock of higher inflation and interest rates was felt in March, with the sector down 11% before rebounding 8.5% in April, supported by positive updates from GMG/SCG and a better than feared CPI print late in the month.
Where to from here? While geopolitical risks are likely to remain elevated, markets will continue to be volatile as inflation and growth expectations evolve. Importantly, not all real estate is the same, and we expect increasing bifurcation in performance both across sub-sectors and individual stocks.
The March quarterly update indicated stable operating conditions, with most REITs reaffirming earnings guidance despite renewed headwinds from cost pressures, elevated interest rates and supply chain disruptions.
MGR and SGP, are navigating a complex environment characterised by rising interest rates and construction costs, offset by a fundamental undersupply of housing. Both companies reported strong sales momentum, particularly in the more affordable land lease and apartment segments, and in stronger state markets like QLD and WA. While acknowledging the potential for rate hikes to slow activity in the first-home buyer market, both firms pointed to the resilience offered by their diversified, multi-project pipelines and significant pre-sales books.
A key focus is the upcoming Federal Budget, with potential changes to negative gearing and CGT for residential investors being closely watched, though new construction could be treated more favourably. Both MGR and SGP are also strategically expanding their build-to-rent (BTR) and land lease platforms, capitalising on affordability challenges and the growing long-term rental market.
We attended the Macquarie Conference, where the key takeaway this year was the clear acceleration in AI adoption. Demand is not merely being driven by model training, but also by the shift to AI inference workloads, which are potentially 10–100x larger than training.
A major beneficiary of this growth is the data centre sector, which provides the critical digital infrastructure underpinning AI development and deployment. Both NXT and CDC (owned by Infratil) announced contract wins approaching 1 gigawatt over the past six months — exceeding the total contracted capacity secured by both companies over the previous 15 years since inception.
For office – it is too early to tell but conversative hiring intentions are starting to translate to long term space demand assumptions. This is particularly evident within financial and professional services sectors. Prime CBD assets in core markets are stabilising, but secondary-grade assets continue to face elevated vacancy, weaker incentives and valuation pressure. While the impact of AI adoption on the office sector is still being played out, back-office process work (structural reset with routine work automated) is expected to be more impacted than front office roles (enhancing productivity) thus likely to place further pressure on secondary-grade assets.
Why us
In a more uncertain macro environment, A-REITs continue to provide defensive earnings and asset-backed capital protection. We believe selectivity within real estate is becoming more valuable. We remain focused on sectors with strong fundamentals and earnings visibility underpinned by secular tailwinds, including land lease communities, data centres and real estate debt. Our emphasis on balance sheet strength and free cash flow supports resilient earnings and relative outperformance, even in a higher-for-longer interest rate environment.
