Why this "real asset" investor has a spring in his step

There are clear blue skies ahead for real assets after a protracted set of challenges in previous years. That was the broad view shared by Clinton Arentz, Trilogy Funds’ Executive Director, Lending and Property Assets, during our series of Rapid Fire interviews.

With the start of a new financial year, we’ve quizzed asset managers focused on distinct parts of the market about the year so far and, perhaps more importantly, their expectations for the next six to 12 months.

In the following Q&A, Arentz delves into his part of the property sphere. You can catch the interviews we’ve done with other professional investors focused on Alternatives, Commodities, Global Equities, and Small Caps by clicking the links at the end of this wire.

What has been the biggest driver of returns in industrial property over the last six months?

The biggest driver has been ongoing tenant demand. 

We're seeing a lot of tenant demand across the country from tenants wanting to establish new premises or expand existing premises, which I think is part of a broader commercial rollout.

Post-COVID, a lot of companies want to get on with business. There's a lot more onshoring now, where companies are looking to house more product onshore rather than import from overseas. Also, manufacturing is very strong. Both manufacturing, and logistics and distribution are showing very strong demand patterns. 

That's the biggest driver of returns because with demand, rents tend to increase. As rents increase, so does value.

What has been the biggest surprise in 2024 so far?

That inflation has remained as sticky as it is. We anticipate that will slowly abate, but unfortunately the same demand pattern I've just described, even in Australian terms, is driving an underlying level of inflation.

It looks to us like inflation will stay higher for longer, but in any event, it is trending down. We're seeing the right macro signals and the broader international signals, but it's taken a heck of a while to do so, unfortunately.

What would cause you to change your positive thesis on strong tenant demand?

We do have a positive outlook, and that's driven by both the factors I've just mentioned. Obviously, there's strong tenant demand. That's good for growth and it's good for rental prices generally, but also the other aspect is that as inflation comes down a little bit, then there'll be an easing of interest rates.

The ripple effect of an easing of interest rates and reducing cost of debt means tenant demand will remain strong. 

We see much more opportunity to build new premises for these tenants moving forward in a slightly lower interest-rate environment than what we've seen over the last 12 months or so.

Will your portfolio look substantially different in the second half of the year, versus the first half?

There are adjustments, in the sense that we've just acquired a large-scale industrial asset, an international distribution company, in Queensland for about $30 million. We're also in due diligence currently to acquire an asset in Victoria, which is also a large-scale Australian manufacturing company.

What we're seeing is that the listed property trusts, those that are listed on the ASX, are trading somewhat at a discount, so there's an opportunity for us to buy these assets using the strong support from our investor base. We are now seeing more assets being offered to market for sale that suit our portfolio than we have for the last several years. 

We expect to see considerable growth in our portfolio. It's now nudging $300 million assets under management. We'd hope to grow that to at least $400 million by the end of the calendar year.

Managed Fund

Trilogy Industrial Property Trust

Australian Property

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What else has you excited for the rest of the year and beyond?

We're pretty excited to be getting back to more of a balanced and stable pattern of economic activity

I think that's probably one critical thing. COVID was so disruptive in so many ways and that's created an inflation spike, which has created an interest rate cycle. I think we're through the worst of all of that now.

Despite all the excitement around the elections, business still goes on. If anything, just changing the government in the US could be quite stimulatory for business in the US as well, in taking some of the guesswork out of things, I think. Whenever there's an election, markets tend to hesitate and slow a little bit. Post elections, they tend to crack on.

The UK election has just been run, with a clear majority win there. Probably the same in elections in the US in November, and Australia is also not too far away. We're seeing a more stable pattern ahead, which is good for investors. It means that investors can invest with more confidence and less volatility. With those strong growth patterns, they should see good levels of long-term capital growth.

For anyone considering investing in your asset class, what might you say to them?

I'd strongly recommend investing in our industrial property asset class because we're finding that the cost to build new premises is considerably higher, for the reasons we talked about earlier. The inflation aspect in part is cyclical, but the longer-term effect is that costs stay high. You see it in the grocery stores, you see it in housing. Costs and pricing have moved up to a higher level.

There's an opportunity for us to buy property assets out of the listed trusts effectively at a discount to replacement cost, so there's really never been a better time to buy because, eventually, people will have to continue to build new premises. The only way to justify that financially is to have even higher rents again. The higher rents will continue to drive the strong price growth. That becomes something of a virtuous cycle, and that's what we see over the next six or 12 months.

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