Page 170 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 9

consumers and businesses. Political stability is a key factor for property, and investors are eager to
see the impact of President Trump’s domestic and foreign policies on US and global economic
activity, and their possible impact on both US and global inflation. Currently, Fed Fund Futures
are pricing in three cuts of 25bp from the Fed during 2025, reducing the Fed Funds target range
from the current level of 4.25% - 4.50% to 3.50% - 3.75%. These cuts are anticipated to be
concentrated in the latter half of the year, with the first likely occurring in June.
Global listed property is less correlated to global bonds over the medium and long term than
many investors assume. However, over the last two years developed market listed property prices
have tracked the movement in the US, UK, and EU 10-year bond yields (specifically the US) very
tightly and have been less influenced by the underlying property fundamentals and earnings of
each property company and sector. If this relationship and correlation continues to hold in the
short term, we should see some positive price increases from developed market listed property as
the US, UK, and EU 10-year bond yields follow official interest rates lower as central banks move
interest rates to their more long-term neutral levels.
Could you identify three shares that fall within your universe that you think will perform well
in the medium term?
Office REITs globally have underperformed since the onset of the Covid-19 pandemic in 2020.
Many businesses around the world were forced to implement work from home policies during the
pandemic lockdowns and subsequent waves of infections. There has been a slow return to the
office environment in the US, with the physical average office occupancy in the 10 largest US cities
still around 51.5% 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 in the US resumes to
more normal levels, and we see a significant reduction in interest rates, the company’s revenues
and earnings should see a meaningful recovery, potentially leading to a significant recovery in the
company’s share price.
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

168 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts