Sector by sector: pathways to recovery in Australian commercial real estate

A low interest rate environment and uncertainty present challenges for investors looking for diversified strategies to defend their portfolios in 2021. As a cyclical asset class, Australian real estate has been subjected to the full effects of the pandemic through the past 12 months, but we believe there are still opportunities for those seeking yield and stability through the recovery.

Retail

Retailers across Australia continue to operate under the threat of closure within a few hours’ notice, and under varying degrees of regulation around masks, distancing, and consumer check-ins as COVID-19 continues to be an on-going health concern. On top of this, the early nation-wide lockdowns produced a sharp acceleration in the penetration of e-commerce into the Australian retail environment, which seems set to persist to some degree after the pandemic.

Nonetheless, we believe physical retail will retain a significant role in a marketplace geared more towards e-commerce. Customers will still be attracted to well-tailored in-store experiences, and many brands already valued their physical space as showrooms for e-commerce sales long before COVID-19 shuttered their doors.

But the pandemic has put the squeeze on retail space, with investors reluctant to move where they perceive a risk to rents without locking in higher yields, at the expense of prices.

We think there is value yet to be found in parts of the sector, and potentially in the opportunity provided by the blank canvass of shopping centres, where certain properties could be utilised in other ways such as mixed-use or residential projects.

Office

The office sector is still confronted by soft demand arising from the move to working from home. Whilst there will be long-term structural change associated with this phenomenon, we expect that there will also be a rebound back to the office over the course of 2021. The nascent vaccines program being rolled out by the Federal Government should help, but more important will be a general economic recovery and perhaps a growing appreciation of the productive and collaborative value of office space.

Quality office space should remain in demand, but ideas around what that entails have changed, with health and safety becoming paramount and a new focus on the areas where employees come together, now that many of us have our own spaces to work remotely. Fewer desk spaces may mean more businesses sharing a floor or a building and new considerations around how that will work.

Portfolio managers will need to actively work to differentiate their products and compete on tenant satisfaction to ensure they remain competitive.

Logistics

For the foreseeable future, assets that support the long-term trend to e-commerce will benefit from the acceleration in this space initiated by COVID-19. This has been especially true for transport and warehousing services on the east coast.
Despite the tight market, we should continue to see growth in valuations. Domestic money may have already found its way into the sector, but offshore investors will increasingly look to move funds to markets and sectors less exposed to the pandemic. As these funds pursue a relatively small set of opportunities, careful selection of assets will be critical. Property in proximity to key customers in dense high-income urban areas, should continue to demand a premium. In many of these areas land is already scarce, which we expect should support the underlying value of the asset independent of income over the years to come.

Alternatives

There are an increasing number of opportunities that don’t fit neatly into the three traditional core commercial property sectors. Strong defensive positioning can be found where cash flows and demand for the asset will benefit from long-term headwinds, such as data centres (driven by the internet of things and autonomous mobility), build-to-rent (which offers exposure at scale to residential real estate) and medical office buildings (increasingly in demand as patients are diverted from COVID-focussed hospitals).

In our opinion, the year ahead offers a number of opportunities across a broad range of real estate sectors. As the post-COVID recovery gets underway, we believe real estate assets remain as a compelling option for those searching for yield in a low interest rate environment and a long-term diversified strategy.

 

Author: Luke Dixon, Head of Real Estate Research – Real Estate, Sydney, Australia

Source: AMP Capital 15 Feb 2021

Reproduced with the permission of the AMP Capital. This article was originally published at AMP Capital

Important notes
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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