Page 169 - Profiles's Unit Trusts & Collective Investments - September 2024

Fund Manager Interviews

office environment in the US, with the physical average office occupancy in the ten largest US cities
still around 50% of their pre-pandemic levels. US office REITs continue to trade at significant
discounts to their US REIT peers given the negative outlook for US office properties and high
interest rate environment over the past two years.
If fundamentals improve for office landlords over next few years as we enter a lower interest
rate, higher economic growth environment, there could be significant outperformance from US
office REITs. Hudson Pacific Properties (HPP) is a unique US office REIT that serves the tech and
media industry with both office and film studio space. The Hollywood screenwriters and actors
strikes in 2023 had a significant impact on the company’s revenues from their film studio
properties. Although the strikes have been resolved, there has been a slow recovery in film studio
activity and the related revenues it generates for HPP, which has resulted in the HPP share price
falling significantly and underperforming its peers. If film studio activity resumes to more normal
levels, the company’s revenues and earnings should see a meaningful recovery, potentially leading
to a significant rerating in the company’s share price and significant outperformance.
We expect to see strong earnings growth from Digital Realty Trust (DLR), a US data centre REIT,
and American Tower Corporation (AMT), a US mobile towers REIT, over the medium term as both
companies continue to benefit from an increase in demand for cloud computing, which has been
enhanced by recent AI developments, and the expected increase in the number of mobile connected
devices over the next few years. Both companies own property portfolios that house the key
infrastructure that enables the digital economy. The global digital economy is expected to grow
significantly faster than global GDP over the next few years. The digital economy continues to be
driven by increased e-commerce and significant technology spends related to cloud computing and AI.

Offshore investments are heavily influenced by the rand. Please give your view on the rand
over the next 1, 3 and 5 years.
The rand has depreciated significantly over the past three years. It weakened c.40% from
R13.50/USD in mid-2021 to around R19.00/USD at the end of May 2024. The rand weakness was
in line with deteriorating investor sentiment, which was also mirrored in the SA bond market,
with the SA government 10-year bond yield increasing from c. 9.2% to 12.0% over the same
period. Global and local investor sentiment deteriorated due to government’s fiscal deterioration,
growing budget deficits, failing infrastructure (load shedding) and slow economic growth.
The peaceful transition from an ANC majority lead government to a newly formed Government
of National Unity (GNU) sets South Africa on a new political path, which could lead to improved
service delivery and infrastructure from government. Increased business and consumer confidence
should lead to better economic growth and prosperity. If our newly elected Government of
National Unity (GNU) remains co-operative and works successfully together over the next 5 years,
we could see a period of relative rand strength over this period on the back of improved investor
sentiment.
The rand has strengthened from R19.00/USD at the end of May 2024 to R17.80/USD in
August. Our model of real effective exchange rates has the rand only 5% or so undervalued against
USD currently, which itself is largely a function of USD strength. Our current model fair value is
R17.00/USD. All things considered, the rand could be anywhere between 5% and 20%
undervalued (depending on the model used). The rand may depreciate in nominal terms over the
medium to long term, it is likely to strengthen in real terms (i.e. depreciate by less than inflation
differentials), if not remain stable at least. Potential relative rand strength over the next few years
could provide South African investors the opportunity to increase their offshore allocations at
more favourable exchange rates.

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