Investable ideas in global listed real estate

Global listed real estate is once again adding diversification benefits to balanced portfolios, and at the same time, delivering the underlying bricks and mortar economic returns of the underlying real estate. Here, we explore new and innovative opportunities across the world that we feel are important in building a dynamic yet stable real estate portfolio for customers.

“Within Global Listed Real Estate, we’re looking for defensive growth,” explains James Maydew, Head of Global Listed Real Estate at AMP Capital.

Maydew says manufactured housing, especially in the US, offers a great opportunity for several key reasons.

• There is limited supply, meaning rents have an ongoing positive growth trajectory.
• The assets generate strong cash flow as very little capital expenditure is required.
• Manufactured housing is a popular option for the ‘silver tsunami’ of retirees currently looking for affordable housing options as the baby boomer generation retire en-masse over the next 20 years.
• Some of the most influential investors in the world, including Warren Buffett and Sam Zell, are believers in this asset class.

The set-up is there for manufactured housing demand to grow and this is expected not just in the US, but increasingly in other locations in the world.

Asian outlook

In Asia, industrial assets are piquing investors’ interests due to long-term structural growth underpinned by rising consumer spending, modernising supply chains and the rapid rise of ecommerce.

“As a result of these trends, there is significant undersupply of warehouses in Asia, in particular in Japan, India and Hong Kong, where only five per cent of stock meets the criteria of a modern warehouse,” says Jessica Koh, Head of Asia, Global Listed Real Estate, AMP Capital.

There is also potential for further cap rate compression as the market matures. For example, Koh says: “Chinese logistics cap rates are currently offering more than 210 basis points spread to office assets. This compares to a mature market like the US, where the spread in cap rates between the two sectors is just 30 basis points. Overall, this offers investors the potential for attractive long-term returns.”

The view from Europe

German residential or multifamily is a market where regulation is creating opportunities for global real estate investors, says Ryan Watson, AMP Capital’s Head of Europe, Global Listed Real Estate.

“There’s an imbalance of supply and demand. Net migration and urbanisation has meant housing stock in Germany is, in our opinion, completely undersupplied. Without new supply, we believe the imbalance will continue. So we see good, consistent returns from owning these assets through rental growth, which will translate into strong capital growth over the next few cycles,” he says.

Watson says the best way to access this asset class is through German local sharp shooters, who understand the market and its regulations. Diversification is important, as is investing in properties in cities that are growing, he says. Scale also matters, with the largest player lifting its margin by 12 per cent thanks to its size and operating efficiencies.

Moreover, the German government caps rents in parts of some major cities. Yet market-rate rents are rising and therefore the gap between the two is underpinning long-term structural rental growth for many years.

Watson comments: “In the event of a downturn, even if market-rate rents were to fall, capped rents would continue to steadily rise, giving investors access to a defensive asset that also has growth potential.”

Australian dynamics

In Australia, we see investors being attracted to real estate fund managers that specialise in the end to end process of real estate, who own, develop and manage office, retail and industrial assets. They are also exploring emerging asset classes such as build-to-rent, childhood education and healthcare.

“The global nature of some fund managers means they are in an excellent position to capture market share around the world, and not just limited to the footprint of Australia,” says Mark Ferguson, Head of Australia, Global Listed Real Estate, AMP Capital.

US opportunities

Creative office space is another interesting US real estate opportunity, says Matthew Hodgkins, Head of Americas, Global Listed Real Estate, AMP Capital.

“Older ways of working are no longer relevant to Millennials. They don’t want outdated, cubic office space. They want a way of working that is more collaborative,” he says.

There are, however, only a few landlords that have been able to adapt their assets to support new ways of working. Most of these are on the US west coast, but that may change over time.

“The west coast is an incubator for a new workplace culture that will spread around the country,” says Hodgkins. “Landlords dominating in this space will be in pole position over the next 10 years to provide these opportunities for the entire country,” he adds.

The ideal situation for any real estate developer is to have limited supply of sought-after product. This is the situation for creative office space in San Francisco, one of the most important technology markets in the world.

In this city, a regulation called Prop M limits how many new office developments can be built. At the same time, there’s strong demand from the established technology Goliaths as well as from future digital titans that need office space as the technology sector continues to grow.

“Seattle in the north, San Diego in the south and San Francisco and Los Angeles in between are some of the most active markets for Millennials. Each market has varying levels of regulation, with San Francisco the tightest and San Diego the loosest. But the ability to build in those markets, irrespective of regulation, is limited by the Pacific Ocean on the west and the mountains on the east, with limited land in between. That will never change, but net migration into those areas is going to continue,” Hodgkins says, explaining this will drive demand for this asset class into the future.

These trends are only a handful of the global opportunities that excite us today and showcase the very diverse range of global real estate investments available. These assets can suit investors with different goals, risk appetite and long-term views but together they complement each other to deliver a well-structured global portfolio.