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What’s the outlook for the listed property sector?

Sequoia Asset Management Investment Manager Winston Sammut discusses property investment strategy, the impacts of COVID and work from home, shopping malls, industrial property, and alternative property classes.

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Tim McGowen: We’re talking today with Mr Winston Sammut, who is an investment manager with Sequoia Asset Management. He has over 40 years investment experience, including 20 years in the listed property industry. Winston previously was the head of listed securities with the ASX-listed property fund manager Charter Hall Group (ASX:CHC). Winston, nice to talk to you today.

Winston Sammut: Thank you.

Tim McGowen: Now, we’re talking property today, in particular the real estate investment trusts, and there’s a lot of subsectors within that sector or that industry. That includes retail, office, industrial and residential. And then we’ll look at some of the alternative opportunities in the property trust sector, childcare, retirement living. And just going back a step, in 2023, the actual REIT sector or the index is actually up 14 per cent. So, it’s been a really strong start to the year despite rising interest rates. So, firstly, let’s start with, in general, what’s your investment strategy when you’re evaluating listed investment trusts?

Winston Sammut: I try to look for a total return-type scenario. It’s not just yield because there are a number of REITs that are offering some very attractive yields, but in terms of the assets that they have or the management might be lesser quality. So, that’s an important aspect. So, we look for REITs that have got good management, good assets, a reasonable sort of yield in this environment now. Last year, the sector was yielding about 5 per cent, 4.9 to 5 per cent. And in an environment where interest rates were very low, that was quite attractive. Since then, obviously rates have been rising over the course of the last seven or eight months, and so that makes it a little bit more or less attractive in terms of just trying to target yield. But the sector has been very strong in January and also December, and that’s a function of the fact that they were beaten down quite a lot over the course of the year.

Tim McGowen: There’s a number of dynamics playing out within the property sector. You’ve got the implications of COVID and the work-from-home policy, inflation and rising interest rates, to name a few. So, if we start by looking at the retail sector, that really has been a victim of COVID in particular, and then the corresponding rapid growth of online sales. How does this sector look at present?

Winston Sammut: Well, the sector has been under pressure for most of the year last year, and it probably continues to be under pressure. And the reason for that is that people have actually been going more online than they have to the physical stores, particularly over the time when the malls were closed. Now, the larger malls, the very big shopping centres, they were the ones that really suffered a hell of a lot. But your neighbourhood shopping centres did quite well and have continued to do well because they’re basically about non-discretionary spending. So, the larger malls are discretionary, where you don’t actually have to buy, it’s not a needed type of thing that you’re buying, whereas a supermarket or chemist, that sort of thing, it’s a requirement that you need to, you know, store up for the fridge and so on your food. So they’ve been doing quite well. So, there is a dichotomy as it were between the types of retail that’s on offer, but they are under pressure and I expect them to continue to be under pressure given the fact that interest rates have continued to rise and the cost of living has put pressure on retail in general.

Tim McGowen: And, as a comparison, the industrial sector really had a boom during COVID. How do you see the industrial sector at the moment?

Winston Sammut: Well, the industrial sector has been very strong, and over the course of the last… I suppose 18 months to two years, and it’s likely to continue to do so. It’s primarily because of the warehousing of goods that people order online and trying to get those delivery points closer to the point of delivery. And so the demand for industrial has been very strong and we’re seeing that in valuations, whereas the valuations of the larger malls have actually been quite under pressure. And the reason for that is that the larger institutional owners of retail property are looking to reduce, have been looking to reduce their exposure to retail. So, there’s a lot of large malls on the market, as it were, on the quiet, with very few buyers. The buyers are there at much lower prices.

Tim McGowen: Does that mean they have to kind of devalue their assets at some point, these retail trusts?

Winston Sammut: Well, that’s the thing. As interest rates rise, the valuers take into account rising interest rates in terms of coming up with a capitalisation rate for properties. And the higher the capitalisation rate, the lower the valuation. And we’ve seen cap rates in retail and in office, which have been the two sectors that have been quite badly impacted by COVID, where cap rates have risen quite a bit. So, valuations have been falling.

Tim McGowen: I was going to ask you about office trusts. And as you know, when you’re in the city, there’s not a lot of people in town on Mondays and Fridays, and a lot of the offices must be half empty, particularly in regards to this kind of work-from-home policy that’s emerged from COVID. Is this putting a lot of pressure on office trusts?

Winston Sammut: It is, but the office owners are sort of trying to put a positive spin in terms of what they’re saying is, “We want to offer better facilities for our employees when they come in.” So, the newer-type properties are doing reasonably well. But, look, this is the real situation. Anybody that thinks that we’re going to get to 100 per cent occupancy in terms of people who are working in offices I think is totally wrong, because now people have choice.

Tim McGowen: And, of course, outside of COVID, the residential property market, and we’ll talk about that. I’ll be interested to know how you can play that through listed trusts, property trusts on the market. Residential has been hit by rising rates of course, and now we’ve got higher mortgage rates appearing, particularly with those rolling off on their three-year floating mortgages. What’s your thoughts on the residential property market?

Winston Sammut: Well, just to give you an example, one of my previous colleagues took out a million-dollar mortgage two years ago at 1.96 per cent. In a couple of months, that rolls out, and he’s going to be paying somewhere between 5 and 6 per cent. So, the interest bill for him is going to triple. Right across the board, people will be under pressure from these rising interest rates as these lower interest rate, lower mortgages things roll off. So, that’s number one.

In terms of what’s available, you’ve got to differentiate between land, apartments and housing. There are different ways of playing that. For example, Stockland (ASX:SGP) is very big on with land that they have big land banks. And what they do is they sell you a block of land. They don’t actually build the house, you have to organise it through a builder that’s on one of their estates, but their deal is land alone.

Then you’ve got somebody like Mirvac (ASX:MGR) that’s got apartments primarily, and they’re good-quality, high-quality apartments. Mirvac’s known for producing a very good product. That sector, the apartment market, has been under pressure because there was a plethora of new apartments being put up left, right and centre, and in the lower interest rate environment. That’s sort of dried up a little bit.

And then in terms of the buyers, you’ve got first home buyers, you’ve got investors. And the issue with the investment market is that, as rates rise, it makes it less economical for someone to buy a property purely to rent. At the end of the day, the rental revenue from an investment property is about 4 or 5 per cent, but that’s before you take out all the costs associated. So, you invest in property to get a capital appreciation, not the income stream.

Tim McGowen: And so you also look outside of the sort of subsectors we’ve spoken about. You look into what you call kind of the alternatives, retirement living, childcare, etc. Where are the opportunities in those subsectors?

Winston Sammut: In terms of both childcare and seniors living — we’re not talking about aged care, we’re talking about 55s and over, as it were, who are retiring into villages, they’re still in good health — now, the way both these sectors operate, childcare and retirement living, there’s two entities. There’s an operating company which operates the businesses, the childcare centres, the aged care, and there’s the property owner. So there’s an “opco”, as they call it, and a “propco”. You can invest in the propco, which purely derives an income stream from the rent that’s being paid. And remembering both those sectors are government-supported. Childcare is very well funded by the government, and retirement is also well funded by the government. It could be better, I guess, but there is government support for both those sectors. So, that’s a positive in terms of when you’re looking at those investments. There is a third asset class, which has only sort of come to the fore in the last couple of years, and that’s rural assets, where there is a landlord that owns the land and gets a rental income on the rural property, and there’s an operating company that, whether it’s a cattle station or whether it’s they’re growing macadamias or almonds, they operate the business. And they’ve been quite attractive in the last couple of years. The yield’s reasonable on those assets.

Tim McGowen: Winston Sammut, thanks for your time. Always good to talk you.

Winston Sammut: A pleasure. Thank you.


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