Real estate outlook: Active management and selective strategies the key to value in 2021

2020 was a year in which our relationship with space was fundamentally impacted, bringing both uncertainty and opportunity to real estate. A year on, investors are still attracted to real estate by high yields relative to the cost of capital, as a result of immense programs of monetary easing from central banks.

Offsetting this is the impact of the pandemic, especially the uncertainty around rents across heavily affected sectors such as office and retail. As a result, while the overarching demand for real estate has not abated, investors have become more cautious, seeking higher yields where there is a risk to income from an investment.

Australian property remains attractive despite uncertainty

Within the Australian market, record government stimulus and measures to protect both tenants and landlords from the fallout of the pandemic have supported the sector throughout 2020; however the scheduled rollback of many of these initiatives through the first half of 2021 presents some uncertainty for local real estate markets. That said, many aspects of the country’s recovery to this point have exceeded expectations, with unemployment in particular lower than the levels predicted by many at the outset of the pandemic.

The success of the transition of the economy from direct government support to other forms of stimulus and a hoped-for recovery in private investment is a key challenge for Australian real estate heading into 2021. By global standards, however, the outlook is relatively positive, and opportunities should persist for those who can select the right assets in the right sectors and secure healthy long-term defensive cash flows.

That’s certainly the perspective of many offshore investors, viewing Australia and some of our neighbours in the Asia-Pacific from the lens of countries much more severely affected by the virus. There’s a reasonable expectation that economic activity in less-affected countries will be more stable through most of 2021 than those hardest hit. For these reasons, overseas interest in Australian real estate has been strong throughout the pandemic, and it is likely that in 2021 this interest will further crystalise into transactions.

Maximising income in a low-yield environment

Low capitalisation rates for Australian property through 2020 have drawn a sharp focus for managers on active strategies to maximise the income side of the equation. Successful managers have actively engaged with tenants to support them where possible, whilst retaining value for unitholders. Considerations around health and wellbeing have been paramount, especially for office portfolios where facilitating return to work will be critical to future value.

Could discretion be the better part of value?

Identifying investments likely to deliver consistent returns in such an uncertain environment calls for a highly selective approach at an asset level. For example, the logistics sector has been a star performer through 2020 due to surging e-commerce sales, but high prices and low yields have made for scarce opportunities.

There is still some value to be found here through certain assets in the retail and office sectors with the potential for resilience and even income growth that may support a diversified strategy through an uncertain recovery. A key part of constructing a defensive portfolio in these conditions will also be alternative assets such as medical office buildings, build-to-rent and data centres that we expect to benefit from longer-term trends that should withstand or even benefit from the crisis.