Three listed real estate sectors riding the tailwinds of the crisis

The word unprecedented has been thrown around a lot recently, and regardless of whether a precedent does for the current health emergency, from a market perspective we are truly in uncharted territory.

In listed real estate, investors are not only dealing with a financial crisis, they have to navigate a class of assets whose physical attributes have shifted dramatically over the space of a few weeks. Lockdowns have fundamentally altered the way we use space, and consequentially the way we value space. Some aspects of this revolution will be reversed with the lockdowns; others may not. Many are part of long-term trends that have been pulled forward by the crisis and there will be no turning back.

From our point of view, investors in listed real estate at the current time should concentrate on three key attributes when evaluating assets: sustainability of cash flows, balance sheet security (particularly access to liquidity) and the viability of the business model in the new “normal”.

When considered under this lens, we believe a number of sectors stand out as stable performers in unsteady conditions.

Data centres and telecommunications towers

The long-term tailwinds were already pushing this sector along at a heady pace, driven by cloud computing, the internet of things and the prospect of autonomous vehicles on the horizon driven by 5G.

As the world embarks on a massive experiment in working from home, demand for data has skyrocketed, with internet traffic increasing by 30% in just a few weeks.¹ Online collaboration and video conferencing has become the core of many corporate operations, and society seems to have become fluent in apps like Zoom overnight.

Of course, it’s not all corporate demand. Educational and personal use are a large part of the story as well. But whereas those two sources of demand are likely to normalise once restrictions on movement are lifted, the same may not hold true for corporate demand. Many companies will be assessing their business models through the crisis and wondering if they really need all that floor space. In our view, a step change in attitudes to remote working will fuel further demand for data and growth for the real estate infrastructure to supply it.

Medical office buildings

This is a property class which has recorded very stable income for a long period of time.²  Demand is needs-based; people don’t generally have much of a choice as to whether to visit the doctor, and under the current circumstances the other major option – the ER – becomes less attractive as the risk of contracting COVID-19 increases.

The crisis is impacting the sector to some degree, with declining numbers of profitable elective surgeries,³ but many of these can’t be put off indefinitely.

Longer-term, the sector will continue to be supported by aging populations across the developed world: US data shows that those over 65 on average visit medical office buildings three times as frequently as those under 45.⁴

In some instances public health service leases on property portfolios in this class can effectively guarantee a government-backed income stream.

Logistics and cold storage

In the past we’ve described cold-storage as recession-proof, and that’s certainly being borne out even in these most unusual of times. In our view, supply chains for essential consumables should stand to benefit from sustained demand through the downturn.

Logistics properties exposed to e-commerce should also benefit immensely from the closing down of thousands upon thousands of physical retail stores. Lockdowns and social distancing will likely hasten the long-term trend to web-based retail, as millions of consumers become more familiar and comfortable with shopping online.

To see the effects of this movement, look no further than job advertisements. Amazon hired 100,000 new employees over the past month and is looking for 75,000 more. In Australia, Myer⁵ have just announced a huge spike in their online retail sales over Easter leading to 2,000 furloughed staff to return to meet that demand.

In our view, investors would be wise to seek exposure to that kind of demand.

¹ https://www.weforum.org/agenda/2020/04/how-governments-and-mobile-operators-are-easing-network-congestion-during-the-covid-19-crisis/
² Green Street Advisors, MOB net operating income and stability figures, March 2020
³ https://www.theguardian.com/world/2020/mar/25/us-hospitals-coronavirus-pandemic-postpone-elective-surgery-procedures
⁴ US Census Bureau, Healthcare Reality investor presentation, Healthcare Trust of America investor presentation 2017
⁵ https://www.businessinsider.com.au/myer-online-sales-rehire-workers-2020-4