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Direct property resilience: 2023’s best property funds revealed

It may be a lumpy asset with unpredictable returns and high relative costs, but Australian property is our nation's beating investment heart. So who was the best fund manager for these mercurial assets last year?

Direct property asset class offers unique benefits to investors, including consistent cashflow, inflation hedging and diversification. The asset class may yield stable cash flows through rental income and can be particularly attractive during times of market volatility.

At its very foundation, direct property represents physical, tangible assets. It’s the concrete, bricks and mortar that may appeal to certain investors.

Property investment risk/return profiles can be broken down into four categories: core, core plus, value-add and opportunistic.

  • Yet like any other asset class, direct property also presents challenges or potential downsides to investors. These may include:

    • Heterogeneity: This refers to the unique nature of each property, including its location, design, condition and the economic factors affecting its market. It essentially means that each property asset can perform differently under the same economic conditions, presenting challenges in valuations.
    • Lumpiness: Generally, properties are relatively illiquid and cannot be easily divided into smaller, more manageable parts for investment or sale. This characteristic makes direct property akin to purchasing a big block of marble when you only need to create a small sculpture; the size and indivisibility of the investment make it more cumbersome and challenging to manoeuvre in terms of buying, selling or adjusting for investment sizes.

    Managing a portfolio that contain direct property assets is a very different beast vs other asset classes such as stocks and bonds.

    The year to December 2023 was a challenging time for many of these property managers due to factors such as rising inflation, interest rates and bond yields. These factors all affected direct property valuations, as lower-risk alternatives became more attractive.

    Even with these hard times, the Australian property market has been resilient, especially due to supply-constrained property assets and sectors that relate to homes, industrial and alternative properties. 

    Now I’ll highlight the top three performing managers from the Atchison approved product list that have outperformed their peers over the past one and three years to 31 December, 2023.

    These top performers were measured from a group of 29 direct property funds:

    • The average total one-year return was -7.23 per cent, with average income return being +3.81 per cent.
    • The average total three-year return was 4 per cent.

    Table 1: Direct property funds performance 1 year, 3 year and 5 years as at 31 December 2023

    APIRFunds & Benchmark1 Year (%p.a.)3 Year (%p.a.)5 Year (%p.a.)
    MAQ0845AUCharter Hall Direct Industrial Fund No.30.716.115.2
    AUS0112AUAustralian Unity Healthcare Property Trust – Wholesale Units-2.413.312.5
    LAM0044AUAlceon Australian Property Fund5.487.2

    Above fund returns are net of fees*

    • Top performer over one year was Alceon Australian Property (+5.4 per cent)
    • Top performer over three years was Charter Hall Direct Industrial Fund No.3 (+16.1 per cent)

    Alceon Australian Property Fund

    Alceon’s approach blends investments in listed property and infrastructure assets with stakes in unlisted assets and is mainly constructed of unlisted property funds managed by outside firms or by Alceon itself.

    For the listed component of the portfolio, Alceon focuses on assets that are strictly in the property and infrastructure sectors, resulting in the avoidance of risks like those from development projects, changes in currency values, and profits from more speculative activities.

    The unlisted component of the portfolio includes a variety of funds, managed by the Alceon Group itself and other entities, covering different levels of investment risk. They aim to put 70 per cent into stable, core investments, 20 per cent into projects with the potential to increase in value, and 10 per cent into property development.

    During December some listed assets that contributed to performance were HMC.ASX (A-REIT focusing on sub-sectors retail, large format retail and health and services) and MGR.ASX (A-REIT with exposure in the development and construction industry).

    Charter Hall Direct Industrial Fund No.3 (DIF3)

    DIF3’s strategy focuses on identifying investment opportunities from Charter Hall Group’s offerings, spreading investments across various locations and tenants to ensure a mix of properties, while taking a hands-on approach in managing these properties, before strategically selling to maximise returns.

    The fund made a 0.7 per cent profit over the year and did better than expected since inception, generating a 13.6 per cent profit each year on average. Over the three months to December 2023, DIF3 signed a new 10-year agreement at Erskine Park in NSW and are receiving a substantial amount of capital from this deal.

    Australian Unity Healthcare Property Trust

    This trust focuses on a wide range of investments within the healthcare property sector, covering everything from owning properties outright to exposure in property investment vehicles like REITs and other direct property.

    Additionally, it can provide loans to facilitate property upgrades. The trust’s notable features include periodic earnings distributions through fixed lease agreements, oversight by expert managers, a broad portfolio of healthcare properties that offer opportunities for income growth, along with the prospect of receiving tax deferred income.  

    It performed particularly well over the 3-year period to December 2023, with returns attributed to capital growth of 8.9 per cent plus income of 4.3 per cent.

    As at December the trust’s top sector allocations were hospitals (52.3 per cent), medical (21.54 per cent) and aged care (6.8 per cent).

    Will Arnost

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