Revealed: Where Super Funds Go Shopping Next

Revealed: Where Super Funds Go Shopping Next

Dear Reader,

1) ‘Banks, builders, and REITS.’

That’s how I summed up the way to play the property cycle over the next five years in my recent presentation to investors.

Yesterday, we got some evidence that such a strategy is working!

How so?

Big real estate investment trust Vicinity Centres [ASX:VCX] released its half-year results. The market liked them too…the stock soared 11% yesterday.

That’s a big move for a REIT.

We can put that down to the market being too negative on the company before the announcement. I was one of the guilty ones too.

I recommended Vicinity in February 2021…but I suggested cutting it later that year when COVID ran through Victoria again. A good chunk of Vicinity’s assets are in VIC, so I played it safe.

I don’t regret the decision because we’ve made profitable decisions elsewhere, but it’s nice to see the general sector is on track.

What can we learn?

Part of Vicinity’s improved profit was from revaluing its real estate holdings higher. This is a key part of the tailwind behind the sector.

But Vicinity also saw improved spending metrics across its centres and improved leasing ‘spreads’ from the COVID train wreck of the last few years.

Here’s something notable I picked up on: Vicinity still has retailers in CBDs and sectors hit hardest (i.e., travel) that haven’t fully recovered. Vicinity is still subsidising and helping here.

Why do you care?

Once we leave COVID behind, which I’m supposing we do eventually, Vicinity still has earnings growth to come from these distressed parts of this business coming back to health.

Then we have potentially more to come from its development plans. All in all, a nice result and outlook.

 

The ‘good news’ is out about Vicinity, so I’m not buying it or recommending it now, but as a long-term play on commercial property, it’s worth following.

For my current REIT suggestions, sign up here!

2) By the way, I’m not the only one banging the drum for commercial property in Australia.

The Australian Financial Review reports this morning that super funds have a huge war chest to go shopping here…and a very good rationale to do so.

Why so?

They are ‘underweight’ commercial property, as they say in the investment parlance.

But perhaps this is the key quote:

Fuelling sentiment is the fact that many ASX-listed property trusts are trading at levels well below the valuations of their real estate holdings.

Indeed.

Commercial property is ideal for super funds, in many ways, because they need big assets that have long time frames plus income.

There’s an important point here. So much of Australian real estate commentary is about the residential sector.

But commercial property has also been an outstanding sector for returns over the years. And you can buy as little or as much as you like on the Aussie stock market.

Consider it if you haven’t!

3) You might have noticed that the market is beginning to make up the ground it lost in January.

One reason, I think anyway, is that commodity prices are so strong. Iron ore, gold, oil, copper, aluminium, gas…you name it, they are currently all roaring along.

It’s hard to be too bearish when this happens because it drives such strong earnings. Take a look at iron ore, for example.

BHP just announced a record interim dividend. Their average iron ore price for the last half was US$113.

Iron ore is currently US$140 a tonne. The longer it holds, the more money BHP brews up in its accounts for its full-year results due in August.

Will iron ore hold? I have no idea.

All I can say today is that the market became too bearish in January relative to what has happened since.

It was also a reason I was comfortable to step in during January to ‘buy the dip’.

One thing gives me pause. I’m starting to see many bullish commodity headlines about a new ‘supercycle’, US$100 oil, a rocketing lithium price, etc.

Mr Market loves nothing better than to pull the rug from underneath us when we least expect it.

But what could cause such a thing?

Right now, the market is obsessed with inflation and interest rates. It’s unlikely to be from that.

It would have to be something that took everyone by surprise. But there’s nothing that really springs to mind to even speculate on.

I’m riding the market as it trends up…but I try not to let confirmation bias get me too carried away, either.

It usually pays to be contrarian.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Don’t be shy! Come check out my podcast on Spotify here. We have some great content…all free. Let me know what you think!