The property sector attracts a lot of interest from investors, and Djerriwarrh’s diversified portfolio contains several quality property companies. Portfolio manager Brett McNeill takes a closer look at what makes these companies attractive.
Approximately 8.0 percent of our portfolio at Djerriwarrh comprises real estate companies, including Mirvac, Goodman Group, Region Group, and BWP Trust. We made substantial investments in Region Group during the 2022-23 period as a result of the attractive value and dividend yield in the real estate sector back in March and April.
Our investment philosophy in real estate mirrors our approach in other sectors: we seek out well-managed companies with robust balance sheets, high-quality assets, strong growth potential, and the capacity to deliver attractive returns to our shareholders over the long term.
Challenges in the property sector
The property sector faced a challenging 2022-23 reporting season compared to other sectors. Although the real estate sector recorded a 6.8 percent growth over the financial year, it lagged behind the ASX200 Index, which achieved a 16.6 percent increase during the same period.
The impact of rising interest rates led to higher interest costs, affecting the profitability and dividends of property companies, potentially more than anticipated by the market. Furthermore, higher interest rates compelled a recalibration of property capitalisation rates, resulting in notable pressure on the office sector.
Upside for our property investments
Despite the broader challenges facing the property sector, we remain confident that Mirvac, Goodman Group, Region Group, and BWP Trust are well-positioned for long-term success.
Mirvac stands to benefit from its residential business, driven by the increasing demand for housing in light of Australia's growing population. The company's FY23 financial results highlighted a robust pipeline for apartments, supported by low unemployment rates, above-average wage growth, rising overseas migration, compelling affordability of apartments, and healthy household balance sheets. Additionally, Mirvac's portfolio of premium office spaces positions it favourably, as the gap between premium and lower-grade office spaces widens, with premium spaces experiencing less pressure.
Goodman Group, renowned for its global management and development of industrial real estate, reaps the rewards of the e-commerce boom and the heightened demand for logistics facilities and warehouses.
We hold Region Group and BWP Trust mainly for their potential to generate attractive income over time. Local shopping centres operator Region Group may find 2024 challenging as interest costs flow through to its profit and loss statement and dividends may ease as a result. However, we are confident that Region will grow after that. The company has quality assets that are well-located, non-discretionary-type neighbourhood shopping centres with large anchor tenants such as Woolworths or Coles, and small essential specialty shops such as butchers, bakers and hairdressers. These assets are better able to withstand economic swings.
BWP Trust is a real estate investment trust (REIT) that invests in and manages commercial properties, particularly Bunnings Warehouses. Bunnings is a great-quality tenant. BWP Trust is a simple, “plain vanilla” REIT that collects rent and passes it through to unitholders through distributions. The balance sheet is strong, and the company has the lowest gearing in the sector. The company is well placed to make acquisitions and we expect distributions to grow.
Our focus on companies with quality assets remains consistent with our investment strategy across sectors.
Confidence in our property investments
The current landscape of the property sector offers good value and attractive dividend yields in select companies. Despite market sentiment that has been less favourable toward the sector, we are confident in the quality of our property holdings. They possess quality assets, robust balance sheets, sustainable dividend payout ratios, and effective management. They offer a good source of income for the Djerriwarrh portfolio, are diversified, and provide a defensive buffer against varying economic conditions.
We see the current environment in the property sector as an opportunity. While challenges persist, our confidence in the quality of our property stocks, combined with attractive valuations, positions us well.