Moving towards the end of the business cycle, investors are increasingly seeking exposure to assets with defensive attributes. Australian real estate investment trusts (AREITs) is a defensive asset class that has shown its ability to deliver strong returns over a variety of market conditions, having outperformed equities over the past one and five-year periods, by 11.81 per cent and 5.7 per cent respectively1. And as the Australian 10-year bond yield hits new all-time lows, the demand for long duration assets like real estate are likely to be well bid.
The influence of positive global trends and long-term contractual income streams, usually in the form of rental income, means that a well-constructed property portfolio can offer stable cash flows even through periods of high volatility and weak economic growth.
Rise of the boomers
Some of the trends responsible for this strong performance are as fundamental as the profound demographic shift affecting western society, as retiring baby boomers re-allocate their not-inconsiderable resources to better suit their changing needs.
Given the swelling population of over 65s and their increasing need for health-care services that will inevitably follow, there is a substantial tailwind for property offering high-quality health care facilities that cater to this demand, such as aged care facilities.
Some of the other opportunities appearing in property are less intuitive, such as those afforded by digital disruption - the replacement of old ways of doing business, of communicating, of storing information - with new online platforms.
Historically commercial property has benefited from the physical presence of businesses and it might seem counter-intuitive to think that it might profit in some way from the forces that are disrupting those traditional models. However, the drive to online and cloud solutions are providing opportunities for listed real estate investors to capture some of the positive value from that disruption through stakes in the real estate and infrastructure required to support it.
With the Internet of Things making its way into fridges and kettles across the globe, the ever-increasing uptake of data-hungry streaming services such as Netflix and YouTube and corporate servers continuing their relentless transition to the cloud, demand for data storage will continue to grow for the foreseeable future. Whilst the term “cloud” conjures images of an esoteric, intangible repository, the space it now occupies is no less real (if somewhat more compact) than the mountains of DVDs, CDs, hard drives and server stacks it has replaced.
Between 2016-2021 global datacentre workloads are set to increase by 27 per cent compound annual growth rate2, more than tripling over that period, and demand for the real estate and infrastructure to support this extra volume will grow in tandem.
As landlords to the internet and the cloud, datacentres will profoundly benefit from this fundamental shift in our society, in a way that should prove resistant to cyclical influences in the wider economy. The highly-specialised nature of the properties involved also presents high barriers to entry, insulating existing investments from oversupply, and typically long-term lease arrangements for big tenants offer consistent cash flows that are largely independent of cyclical factors.
Much in the same way as we discount the bricks-and-mortar implications of sending our data to the cloud, it can be easy to forget that the disruption of physical stores by e-commerce retailers has positive implications for real property as well.
Consumption trends have been shifting for many years from retail stores to online platforms, spearheaded by the rise of e-commerce titans Amazon and Alibaba.
But while the storefronts have moved online, physical storerooms have taken on a new significance. Logistics facilities have been nicknamed ‘cheap malls’ in certain real estate circles, for the way in which they have taken over the role of shopping malls in e-commerce transactions, providing storage and access to goods. Online retailers are investing heavily in their logistics centres, with automation and proximity to transport hubs such as airports and intermodal rail becoming vital assets in their quest to beat their competitors on price and delivery speed.
The resulting improvements in cost and convenience are only increasing the trend to online. The UK is one of the leaders of this structural trend, with e-commerce penetration (excluding food) approaching 40 per cent and forecast to move towards 50 per cent in the coming three to five years3. This is driven in part by the proliferation of mobile technology, with 47 per cent growth in online sales via mobile devices in 20164.
Concurrently, industrial floor space in major cities now comes at a premium, as industrial property has been re-zoned over the last twenty years to higher-value land use, such as residential. This is causing an inflection point today in the logistics market, squeezing rents, capital values and occupancy to all-time highs in modern facilities located close to the consumer.
Despite broader market fluctuations, the relentless march to online services will continue to create value in selected real estate sectors into the foreseeable future, even as it disrupts real-estate business models in other sectors. High-performing REITs are able to identify these trends at an early stage and use them to capture the crucial defensive positioning sought by investors at times of uncertainty and late in the business cycle.
If central banks further loosen monetary policy over the next twelve months, lowering bond yields, the case for investment in those AREITs which are taking advantage of global tailwinds and which offer the security of long-term income streams will become even more compelling.
1 AMP Capital, 2019
2 Cisco, Global Cloud Index, 2018
3 CBRE Global Research, 2016 (data represents non-food shopping)
4 IMRG Capgemini, eRetail Sales Index, 2016
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