Where are real estate’s next opportunities?

Luke Dixon
Head of Real Estate Research – Real Estate
(Sydney, Australia)

 

Sector outlooks shed light on real estate’s next opportunities for 2021

The investment hypothesis for Australia’s real estate sector unmasks how significantly COVID-19 and the associated lockdowns reshaped how we live, work and shop in the space of just one year. As vaccines are rolled out across the country, Australia has adjusted to a new normal and the early stage of the recovery has taken an unexpected form.

The gradual withdrawal of some government stimulus in March still poses a risk to the economic outlook, but many indicators point to a faster-than-expected recovery with unemployment holding at low levels.

Globally, macro conditions have dramatically improved, bolstered by successful inoculation roll outs in the US and the UK, which have supported gains in both business and consumer confidence.

We see Australia within a clique of geographies in our region, including Japan, Singapore and the higher quality Chinese cities, as markets expected to attract significant allocations of international capital in the near future. The global hunt for yield, combined with the ongoing low interest rate environment, partly explains Australia’s attraction as an investment location, but its strong response to COVID-19 is also playing a role.

From unknown to the alternative

The uncertainty that turned out to be the theme of 2020, has largely rewritten the investment theses for the core sectors and elevated the profile of assets that were once considered niche or alternative. Structural demand drivers are the common denominator among the assets that make up this segment and they are being leveraged to offset the potential impact on the performance of core assets in property portfolios.

If the US experience is reflected in Australia, we believe domestic investment inflows should find their way into these defensive real estate assets, including built-to-rent property, refrigerated logistics sites, neighbourhood shopping centres, land lease communities and data centres.

In our view, investing outside traditional real estate segments will be the key to achieving target income returns through this post-pandemic period, but this is not the only segment where we see opportunities. Disciplined analysis of the core sector assets should reveal opportunities where reactionary negative sentiment disconnects from investment fundamentals.

We believe pricing support for low interest rates is expected to continue but the recessionary impacts on spending may result in more moderate returns, even as business performance recovers.

The rise of the home office

Retail and office bore the brunt of pandemic shutdowns and the ongoing investment case for these markets is nuanced. The single biggest local impact of COVID-19, apart from economic repercussions, is the profound and structural shift in how millions of Australians work. The impact of this historic and structural change is evident and while the full impact is yet to play out, what we do know, is that it is driving convergence and strengthening the case for flexible design.

The COVID-normal workplace will include a higher WFH com