In May, a deteriorating global growth outlook and continued trade disputes continued to cause an ongoing decline in bond yields, driving investor appetite towards interest rate sensitive asset classes such as AREITs and listed infrastructure. Domestically, the Federal election result and its absence of changes to negative gearing and capital gains taxation buoyed the broader equity market, and in particular residentially exposed names re-rated sharply during May. The broader backdrop however remains challenging, characterised by low core inflation, persistent slack in employment and a housing market constrained by lending restrictions. As a result, the Reserve Bank cut the cash rate to 1.25% as widely expected, addressing spare capacity in the labour market to progress towards the inflation target.
|Investment Performance as at 31 May 2019||Month||Quarter||1 Year||3 Year||5 Year|
Freehold Australian Property Fund
|Freehold A-REITs & Listed Infrastructure Fund*||1.3%||3.8%||14.3%||6.1%||12.8%|
*Net of fees
*A-REITs Index is the S&P/ASX 300 AREIT Accumulation index; Listed Infrastructure Index is a subset of S&P/ASX 200 Index infrastructure sub industries, as defined by the Global Industry Classification Standard (GICS)
- In sector news, both Dexus and Mirvac undertook significant capital raisings of $964m and $750m respectively to drive growth initiatives. Despite the size of these raisings, these were absorbed seamlessly, indicating the depth of capital seeking exposure to the asset class.
- Additionally, the first significant regional retail transaction was completed by Scentre Group selling a 50% stake in Westfield Burwood to Perron Group at a slight premium to book value, which brought relief to other retail names by demonstrating price discovery. This compares to Vicinity's October 2018 transaction of sub-regional and neighbourhood shopping centres at a -5% headline discount, and the Group's recent June valuation update which posted net declines within these categories. This weakness within the retail category is in stark contrast to commercial office and industrial valuations, where direct market transactions indicate further valuation gains driven by income growth and capitalisation rate compression.
- Looking forward, the Fund is defensively positioned with an overweight bias to both office and infrastructure, with a significant underweight weighting towards the retail sector. Global headwinds continue to build and the yield curve continues to imply a negative outlook, which is supportive of defensive sectors such as AREITs and listed infrastructure. With both sectors going 'ex distribution' in late June, this should provide further support heading into the August reporting/confession season.
- Any progress around the ongoing trade war;
- Property valuations and other developments as we head towards confession season just around the corner; and
- World cup cricket and the Matildas' rip-roaring momentum in France.
Detailed fund updates:
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