23 Nov 2022
Trading conditions since the start of 2022 have been challenging for investors. High inflation, rising interest rates and the prospect of slowing economies have caused considerable volatility in equity and bond markets.
While in no way immune to the prevailing macroeconomic challenges, we believe the global real estate sector has the potential to offer a valuable level of diversification to portfolios. Subject to the right strategy, an allocation to this key asset class could enhance portfolio resilience or even boost returns in the months and years ahead.
Although global real estate faces many of the same challenges as other asset classes when it comes to delivering short-term growth, its sheer diversity is a significant advantage.
The asset class has various sectors – from industrial units to offices and residential buildings – across markets which are at varying stages of growth and development and subject to differing monetary policy.
A good example comes from Australia where, until recently, online shopping hadn't taken off to anywhere near the same extent as in the United States or Europe. The rapid growth in e-commerce – a trend which Covid-19 pandemic only accelerated – has resulted in a surge in demand for property in the industrial and logistics sector across the country. Today, Australia has some of the lowest industrial vacancy rates in the world, less than 1% in the case of Sydney. These positive supply/demand dynamics are leading to strong rental growth. This is likely to provide some protection against capital losses as increasing interest rates feed through into yield expansion.
With the right country-level insights and analysis, it is possible to uncover similarly attractive opportunities across the globe.
ESG (environmental, social and governance) concerns are playing an increasingly important role in shaping demand in the global real estate sector – as well as our own trading decisions.
It's crucial to assess investment properties in terms of their ability to meet current and likely future sustainability requirements, both in terms of tenant demand and regulatory obligations.
Buildings which fall below this threshold will require substantial capital expenditure, will struggle to attract tenants and are therefore at risk of delivering below-average returns.
Conversely, the prospects for properties with best-in-class sustainability credentials are considerably brighter – they're likely to deliver more resilient and durable income streams.
The office sector provides a good example of how investors can continue to identify value in a fast-changing market by making an in-depth analysis of investment opportunities as well as their existing holdings.
The outlook for offices has changed substantially since the start of the pandemic, with most occupiers now operating some form of hybrid working arrangement for their staff and generally requiring less space in aggregate. To identify assets which offer the greatest resilience in the face of these changes in working patterns, we evaluate office buildings on criteria such as flexibility, proximity to amenities, connectivity to transport links, technology and sustainability.
For example, how easy it is for tenants to reconfigure their workspace to accommodate hybrid working patterns? What sort of access does the building have to local services such as retail or childcare? How good are its transport links and does the building have changing facilities/bike storage? We also look at the technological capabilities of the building and its performance in terms of sustainability.
Offices that score well according to this analysis are more likely to attract and retain tenants, and therefore deliver positive rental growth in the future.
Another way to add diversification to a direct real estate portfolio is to invest into listed holdings such as real estate investment trusts (REITs).
This strategy can provide access to countries or regions where direct investment is not practical. For instance, many UK-domiciled funds are unable to invest into US direct real estate in a tax efficient manner, meaning listed is the most obvious route. Listed real estate can also be a route to areas of specialist real estate such as healthcare or telecommunication towers where investors can gain access to diverse portfolios of scale. Listed real estate generally offers far more liquidity than physical property but is generally subject to a greater degree of volatility.
We believe that diversification and revenue-producing assets can help investors navigate today’s uncertain markets. An asset class such as global real estate, with its diverse geographies, sectors and opportunities, can potentially tick both these boxes.
That said, in an evolving market, deep insight and analysis is vital when it comes to identifying quality properties with the potential to rise in value, maintain high occupancy rates and provide durable, growing and diversified income streams for a global real estate portfolio.
RISK WARNING
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.