Stars aligning for Australian listed real estate in 2021

We believe there are some early indications that inflation may be on the move for the first time in more than a decade are one of five distinct preconditions framing up the listed real estate sector for its Goldilocks moment in 2021. The confluence of low interest rates, the global wave of COVID-19 stimulus payments along with the cyclical re-allocation of capital, corporate activity in the sector and the potential for inflationary growth are working in concert to build a compelling investment case.

Globally, rates are pinned to the floor and we know capital intensive assets, such as real estate, love a low-rate environment.

Around the world, governments are scrambling to prop up pandemic-scarred economies with massive injections of stimulus funding, such as the Biden administration’s proposed US$1.9 trillion package. These historic payments will find their way into local economies, supporting asset valuations and eventually putting upward pressure on inflation.

If inflation does begin to rise, investors will need to identify hedges, which will put sectors such as infrastructure and real estate in the sweet spot.

Deals and corporate activity are already on the rise across the real estate market as pandemic survivors scour the landscape and look for opportunities to accelerate their own growth. Conversely, over-leveraged operators are being forced back to the market to recapitalise and build a bridge from the pandemic to the post-COVID-19 economy. There are businesses that have not yet normalised their earnings yet and they have no choice except to re-capitalise.

COVID-19’s impact on global real estate was swift and brutal as the lockdown transformed city centres into ghost towns almost overnight, significantly impacting cashflows. But with inoculation programs being rolled out around the world, there is an optimism that life is returning to some sort of new normal and it is powering the transition to value prospects.

Investors are in the hunt for that “re-opening trade”, and with consensus that the pandemic impact is already largely priced into listed real estate, we are predicting a big recovery this year. The cyclical focus is now moving from defensive assets and expensive growth plays to value propositions.

Australia’s listed real sector is expected to benefit from a resurgence in immigration once international borders reopen. This is at odds with a lot of the very downbeat analysis of the population outlook, but we need to look beyond border shutdowns and squabbles over vaccines.

The world looked on enviously through 2020 as Australia charted a relatively smooth course through COVID-19 and this performance has made it a more attractive destination for residents of any number of less-fortunate countries.

Australia has done an exceptional job. Our (relatively) well-functioning society and economy are the envy of many. Our attractiveness as a destination for international talent should put population growth back on trend once travel normalises and drive the value of real estate assets.

Alternative property set to feature

Alternative property sectors, which have been a feature of the US market for decades, are only just emerging in Australia as investors awaken to the potential of stable and growing cash flows generated from property assets outside the traditional real estate sectors of office, retail and industrial, particularly in the current climate.

In our opinion, the Australian alternative property market bears a strong resemblance to its US counterpart’s historical path. In 2009, alternatives comprised around 15 per cent of US property benchmarks; today that figure is 55 per cent. In the same time the allocation for the three traditional plays have fallen from 40 per cent of the benchmark to 23 per cent.¹

We believe this is where listed activity is likely to focus in Australia, rewriting the composition of the investible universe with a growing opportunity set for alternative real estate including dedicated investments for manufactured housing, aged care, healthcare, build to rent, lodging as well as digital infrastructure, such as mobile phone towers and data centres and more e-commerce warehousing and distribution options. Some existing listed real estate players are diversifying into these new categories but much of the market shift will be spearheaded by these new, sector-specific vehicles, where a management team are dedicated to that sector.

In our opinion, the performance of these segments will likely balance out the impact of any post pandemic hangovers, such as softer office occupancy and the impact of e-commerce on retail returns for the listed property portfolios.

Global perceptions of the Australian market are not always well-developed, with many global analysts only aware of the major international plays without any insight into the next-level opportunities, typically as they have lower liquidity in their early growth phase.

In our view, the potential for Australian listed real estate this year is historic, pending the alignment of market preconditions such as low interest rates and a nascent rise in inflation, but fortune will favour the brave and the early adopters will reap the biggest rewards.

¹ MSCI U.S. REIT Index, AMP Capital