Another look at the property
After a year and a half of a pandemic, COVID-19 has accelerated pre-existing trends in real estate assets, creating headwinds for some sectors and tailwinds for others, according to fund managers.
With global lockdowns intermittently and behavioral changes underway such as working from home and shopping online, the office and retail sectors appear to have absorbed the heaviest impact. However, the industrial sector, fueled by the growth of e-commerce, and the alternative real estate sector are definitely catching the attention of investors.
According to Zenith’s’Sector report – Real estate‘, the announcement of a COVID-19 vaccine in November of last year pushed stock markets higher and resulted in a significant rotation into value stocks. At the same time, the report found that despite the strong absolute returns of 25.2% and 30.7% for the 12 months to May 31, 2021, the S & P / ASX 300 AREIT index and the FTSE EPRA / NAREIT index Developed Index $ A Hedged index failed to recover from their 2020 declines and lagged in rapidly recovering stock markets.
The retail sector, already problematic for several years, has seen its performance punctuated by market turbulence, however, there are many “nuances to the story”.
Chris Bedingfield, co-founder, director and portfolio manager at Quay Global Investors, said that in markets that had passed COVID-19 and had been fully reopened, physical retail was actually doing better than in 2019, however, the large-format shopping malls had to offer more than shopping to survive.
“Retail is going to survive this because retail is not just giving you the opportunity to shop, it is going to give you the opportunity to be entertained and that’s where I think.
Australian shopping centers are much better than their American or European counterparts because they have a very strong inclination for services, ”he said.
“I’m more afraid of smaller and midsize malls. “
Stuart Cartledge, managing director of Phoenix Portfolios, pointed out that there are three main categories in the retail industry and their performance has been affected very differently throughout the pandemic.
These three categories included large-capitalization mega-centers, such as the Scentre Group portfolio, mid- to mid-cap regional shopping centers, a predominantly Stockland-style portfolio, and convenience centers largely anchored by supermarkets such as Woolworths. and Coles as well as a few specialty shops.
“Retail has been hit hard by COVID-19 at the high end of the spectrum, the hardest. And the other thing that has been bubbling in the background for several years now has been the downgrade and COVID-19 has happened and has actually sped up that process. It remains to be seen how long this change will last after COVID, ”he noted.
“If you had asked me this kind of question before COVID-19, I would have said we have a preference for the forked approach of large and mid-cap regional malls at one end of the spectrum and convenience stores at one end of the spectrum. The other.
“But what happened through COVID-19 was that the mid-level assets performed really well because people didn’t go to work and they did more shopping in their local areas, but the super centers, especially the CBD type, have really suffered.
Shares of Scentre Group rose 23% year on year to June 30, 2021, according to FE Analytics, while those of Stockland, a mid-sized company, rose almost double to 42%.
Cartledge said his fund had a small exposure to the Scentre group and an overweight to convenience stores.
“Our positioning has shifted from the Scentre group to the surrounding area to reflect the lower risk. “
He said his concern was that Scentre Group was taking a higher risk approach of having a much better balance sheet.
“It may turn out to be the right move, but we think it’s a risky position especially for an asset class that is under pressure online as well as COVID-19.”
INDUSTRIALS ON FIRE
Managers agreed that there was undoubtedly a growing demand for industrial space, due to COVID-19, which had provided favorable winds for the area, and an accelerated shift to purchasing online and the growth of e-commerce.
According to them, there was still a huge unmet demand for high quality industrial assets and this should continue to keep the pressure on the price of these assets.
Steven Bennett, Managing Director of Charter Hall Direct, commenting on the Australian Real Estate Investment Trust (AREIT) industry, said demand for REITs was still very strong as the distribution yields of diversified AREITs were quite high, with a average of about 4.6%, and the index was still lower than it was before COVID-19.
That said, Bennett pointed out that the standout sector within AREITs was fund managers such as Goodman Group, Charter Hall or Centuria.
“Part of the reason they have performed so well and why most people, including ourselves, think they will continue to perform, is because the way co-investments take capital from third parties really pulled them on the growth side, and you can grow the fund management business and profitability much faster than if you’re a real estate investment company that collects rents, ”he explained.
“This is also part of the reason why Goodman is often quite favored as he combines the fund manager with the tailwinds of this industry of industrial logistics,” Bennett said.
On top of that, Australia’s penetration rates and e-commerce were still far behind countries like China, the UK, and the US and were around five years behind the US, which also offered some room for growth.
“The second key trend concerns offshoring. The government has realized throughout the pandemic that it needs to have national resilience in areas such as pharmaceuticals, vaccines and food logistics, so we are going to see a continued push for some things to be done. down. This is exactly the opposite trend to what has been happening for several decades of offshoring. “
Commenting on Goodman, Cartledge added, “When we model something like Goodman Group, which has an industrial portfolio around the world, we are certainly willing to accept the argument that they are going to have very strong profit growth for a while. number of years because the market in which they operate is very strong, making significant development profits, generating performance fees.
“So we think that will translate into some good things in terms of earnings growth for this stock, but then we have to marry that with what we pay for it.”
However, Bedingfield said that, at the same time, industrial or logistics assets are currently quite expensive, which likely makes the industry one of the hardest to find value.
“This area is hard to find good opportunities, we find some of them, but it’s probably the hardest part of the market, to be honest,” he said.
“It’s not just a question of demand, it’s a question of supply, and how easy it is to deliver that supply. It [industrial assets] feels good for now, but at some point the supply will catch up and overall returns will be quite average.
“The industry is on fire and there is no doubt about it. But I guess my concern would be in the longer term, as supply catches up with demand and you will get a normalizing effect, ”Cartledge added.
“I would definitely say that what we’re seeing right now is definitely warm conditions, whether it’s a peak, who knows, but it’s definitely not the trough.”
While traditional sectors still struggle to determine what the post-COVID reality would look like for them, investors are starting to shift their focus from these assets to alternative real estate. While there are different definitions of what is classified as ‘alternative’ the most common examples would be daycare centers, residential centers, and data centers and this has grown significantly in the US market over the past two years. years.
As a result of this, there is a strong belief that Australia would follow this trend, with the alternative sector being described as a ‘sleeping giant’ and expected to attract more institutional capital in the years to come.
Patrick Barrett, portfolio manager of Charter Hall, listed securities, confirmed that the alternative asset class in Australia is becoming a “more institutionalized asset class” instead of being owned by more individual operators in Australia. the past.
“There is institutional capital behind it and sophisticated investors now. And there is a changing acceptance of these asset classes in Australia, which has changed dramatically over the past five to ten years, ”he said.
According to Bedingfield, the residential sector was currently one of the more exciting sectors among the alternatives to watch.
“We tend to have a lot of housing in our portfolio, especially in the United States, and in the residential realm we really like coastal apartments and we also like single family housing because housing is going crazy everywhere.
“We think that after COVID-19 everyone will reassess their life priorities a bit and that has included investing more in their home.
He said that another area that would be interesting to watch is also prefabricated housing, which Stockland is currently embarking on, as it offers a much more investor-friendly model and is expected to have more of a future than apartments or multi-family properties.
Grant Berry, director and portfolio manager of SG Hiscock, said the lifestyle and vacation communities sector is particularly attractive to REIT investors as the investments are made in land, with the potential to expand. through development. This sub-sector is becoming more and more common as larger players settle in this space.
In addition, rents in the lifestyle sector were relatively secure as residents were often covered by the government pension system and the rent assistance supplement.
“That said, some stocks in this space have seen tremendous growth and seem relatively expensive, so we’ve reduced our exposure. But it is considered a good sector and the prices recognize it.