OnePath WS-Property Securities Trust (AJF0803AU) Report & Performance

The S&P/ASX 300 AREIT Accumulation Index rebounded in October, up 9.9% as investors returned to the interest rate sensitive sectors, given the belief that interest rate increases are nearing their cyclical peaks (both domestically and globally). The RBA’s surprising 25 bps increase in October was followed-up with another 25 bps on Cup Day, despite increasing inflation forecasts for Australia, not falling back to the 2% to 3% band until 2025 at the earliest. All sub-sectors were positive for the month but office barely so, as the cyclical and structural headwinds take hold. Domestically, the performance was driven by the ten-year bond yield falling 13 bps, to 3.76%. This was only after reaching an intra-month high of 4.20%. Crucially, real interest rates dropped 37 bps, finishing at 1.37%. Implied inflation expectations regained the 24bps it dropped in September, back to 2.38%. As stated last month, this is a “low figure implying a lower inflationary period in comparison to the last decade, which was an extraordinarily low inflationary era. This is counterintuitive to both the domestic and global outlook suggesting a continued and entrenched higher inflationary environment over the mediumterm before current inflation figures reach their target levels”. The Australian Dollar was down slightly, finishing under US$0.64. Global REITs underperformed the AREITs, delivering 3.1%, with the retail sub-sector leading the way. The general market (via the S&P/ASX 300 Accumulation Index) rose 6.0%. Financials and Energy were the other outperforming sectors for the month, whilst Materials and Consumer Staples finished down.

The S&P/ASX 300 AREIT Accumulation Index plummeted 13.6% in September, as investors globally fled the interest rate sensitive sectors on the back of an increasing likelihood of further interest rate rises, along with rising real bond yields. (Only Utilities fared worst). The fund managers, industrial and childcare sub-sectors were the worst performers in the AREITs. Global REITs were not dissimilar to the AREITs falling 11.8%, with the industrial subsector also the worst performing. The general market (via the S&P/ASX 300 Accumulation Index) dropped 6.3%. Energy and Materials were the outperformers for the second- consecutive month.

The S&P/ASX 300 AREIT Accumulation Index plummeted 13.6% in September, as investors globally fled the interest rate sensitive sectors on the back of an increasing likelihood of further interest rate rises, along with rising real bond yields. (Only Utilities fared worst). The fund managers, industrial and childcare sub-sectors were the worst performers in the AREITs. Global REITs were not dissimilar to the AREITs falling 11.8%, with the industrial subsector also the worst performing. The general market (via the S&P/ASX 300 Accumulation Index) dropped 6.3%. Energy and Materials were the outperformers for the second- consecutive month.

The S&P/ASX 300 AREIT Accumulation Index fell 3.6% in August. The Retail AREIT sub-sector was the outperformer for the month, as the sales growth and re-leasing spreads surprised the market. The ten-year bond yield rose 54 bps, to 3.6% recovering nearly all of last month’s drop. The RBA’s 50 bps uplift in official interest rates is expected to be replicated for the next meeting, marking 225 bps in increases since May.

Real interest rates rose 35 bps, finishing at 1.21%. Implied inflation expectations thus rose ~20 bps to 2.38%. Despite the lift this intuitively remains on the low side, as both the domestic and global outlook suggests a continued and entrenched higher inflationary setting going forward. Global REITs fared worst, dropping 5.7%, negatively impacted by the rising rates globally, especially from the rhetoric continuing to emanate from The Fed. The general market (via the S&P/ASX 300 Accumulation Index) rose 1.2%. Reversing last month’s performance, Energy and Materials outperformed, whilst IT joined the Staples and AREITs, as the laggards.

The S&P/ASX 300 AREIT Accumulation Index rebounded 11.8% in July. The ten-year bond yield falling 60 bps to 3.06%, having exceed 4% mid-June, drove the rally, as the market prices in interest rate cuts to commence in the medium-term, looking through the forecast increases still expected in 2022. The US Fed’s controversial pronouncement of being closer to neutral drove the yield compression in late-July. Yield curves flattened in Australia and inverted elsewhere, most notably in the USA, signifying a slowdown.

Real interest rates fell 55 bps, finishing at 86 bps. Implied inflation expectations declined marginally to 2.2%. This remains on the low side, given the data and expectations in the market surrounding inflation going forward, moving to an environment that we believe should see higher inflation and interest rates than witnessed in post-GFC, which was driven by some easing on globalisation and the associated, predominantly deflationary impacts. Entities reliant upon lower return hurdles, with a larger portion of active earnings streams (ex-Residential) drove the AREIT index up, led by the fund managers. Industrial rebounded, lower yields assisted in maintaining the sub-sectors tight cap rates. Global REITs also benefitted from these tailwinds, rebounding 7.7%. The general market (via the S&P/ASX 300 Accumulation Index) rose 6.0%. Materials was the sole sector to fall, as the global growth concerns rise. Only IT domestically outperformed the AREITs, benefitting from the dive in yields.

Future investment strategy
We continue to target Australian Real Estate Investment Trusts (AREITs) that provide solid fundamentals over the medium-tolong-term that are trading attractively relative to other AREITs. Overall we endeavour to invest in entities that offer a combination of:
– A Net Present Value (“NPV”) Discount;
– An Internal Rate of Return (“IRR”) Premium;
– Ideally a (Real, not manufactured) Free Cashflow Yield Premium; and
– A Lower Price to Net Asset Value (“NAV”).

The S&P/ASX 300 AREIT Accumulation Index dived 10.4% in June, as the rising rates complex continued to take its toll on equity markets and in particular profitless entities (namely tech). Tax loss selling is believed to have had an even greater impact than previous years, with key indicators suggesting that the markets and sector are oversold. The RBA surprised some, lifting official cash rates by 50 bps in an overdue attempt to get in front of the inflationary pressures. The risk of a recession consequently grows, as the demand-side of the economy feels the force of on-going interest rate rises to curb the predominant and entrenched supply-side constraints. This whilst leading economic data is starting to highlight the economic stagnation associated with rising inflation. Entities with a larger portion of active earnings streams (exResidential) drove the AREIT index down, led by the fund managers once more, which are being re-rated lower, given the unfavourable backdrop. Higher interest rates and lower multiple assumptions are belatedly continuing to be applied to their earnings streams.

By property sector, industrial was the worstperforming, as its cap rates are the tightest heading into this contractionary environment. The ten-year bond yield rose 31 bps to 3.66%, having exceed 4% intra-month, as the market priced in further interest rate rises. Real interest rates increased more significantly 46 bps, finishing at 1.41%. The market appears to be implying that the supply-side induced inflation will material subside over the medium-term. Global REITs outperformed AREITs but were not immune to the rising rate environment, delivering negative 7.8%, dragged down by office. The general market (via the S&P/ASX 300 Accumulation Index) was down 9.0%. Materials were the main drag in Australia, as the growing concerns of an economic downturn implies less demand for inputs.