10 reasons, 3 stocks to back Aussie listed property

Defying, at least temporarily, its defensive characteristics, listed property valuations in 2020 and 2021 responded to many of the same pandemic-linked stimuli as other sectors. When the first rays of vaccine hope emerged last November, commentators rushed to interpret scientific breakthroughs into a language investors understand – with varying degrees of success, as irrational sentiment drove much of the movement.

Australian real estate investment trusts were hit particularly hard in the earlier stages of the pandemic, particularly those following the AREIT index, which is heavily weighted to the retail property segment. Last May, the S&P/ASX 200 Real Estate Index was down around 35% year-on-year, compared with declines of just over 20 per cent for the broader S&P/ASX 200 and about 25 per cent for global REITs.

But as a couple of the contributors below suggest, the listed property sectors of logistics, data centres and, to a lesser degree, healthcare should be the top performers throughout 2021 and beyond. In the following wire, they discuss how key aspects of the pandemic and recovery are reflected in their listed property decision-making.

5 themes driving listed property

Amy Pham, Portfolio Manager, Pengana Capital 

The pandemic caused great disruption and strong headwinds for property categories like large discretionary malls and the office sector, but it is also supporting the emergence of alternative sectors. The AREIT sector is increasingly gaining exposure to structural themes that will likely play an important role in the 21st-century economy – these include increased data usage, e-commerce, logistics, growth in infrastructure spending and renewable energy sources.

Currently, the AREIT market remains dominated by the core sectors such as retail, office and industrial. This comprises around 94% of the index compared to alternative assets of only 6%. This contrasts strongly with global peers, particularly in the US and UK, where alternative sectors make up more than 50% of the index.

We believe Australia will follow these established trends for the following reasons:

1. The search for income grows harder with historically low fixed-income yields and extremely accommodative monetary policy undertaken by central banks, including the RBA, which means sectors with sustainable income sources will be in great demand.
2. The structural shift to e-commerce, while hurting the bricks and mortar of discretionary retail malls is benefiting sectors such as logistics and data centres. We see Australia following the US trend in e-commerce adoption, expecting current online penetration of 11% increasing to 20% by 2025.
3. Corporations freeing up their balance sheets through sale and leaseback transactions will open up new assets which have traditionally been held by owners and operators such as hospitals, farms, petrol stations, data centres, student housing, telecommunication exchanges and cold storage.
4. The structural shift toward working from home, if maintained after the pandemic, will increase the demand for assets supporting more flexible working such as shared office space, data centres and storage.
5. More capital from global investors is expected to chase alternative assets as retail is still unpopular and industrial is becoming increasingly competitive. This helps make these new alternative asset classes attractive, especially those that have proven to deliver strong returns in other global markets such as data centres, manufactured housing, childcare, education, petrol stations and storage.

Looking at the longer-term impacts of the pandemic, there will be a cyclical headwind from higher unemployment, lower GDP growth and a consequent impact on tenant demand, vacancy rates and market rents. Typically, the core sectors such as retail (particularly discretionary), office and industrial are more cyclical and tend to perform in line with each other. Alternative real estate sectors tend to be less cyclical as they are driven by secular and structural trends. These secular trends, such as increasing urbanisation, ecommerce, ageing population, immigration and climate change, underpin property demand in sectors such as childcare, seniors living, healthcare, data centres, transport and agriculture.

Many reasons to like resi, industrial

Philip Ryan, Co-founder and Managing Director, Trilogy Funds Australia

The areas I believe will hold the most appeal in the next few years, using a helicopter approach, are industrial and residential property. 

Industrial property has largely been unaffected by COVID-19, especially as there were no issues resulting from lockdowns.

Within industrial, the logistics sub-sector will also perform positively, as large companies benefitting from the e-commerce boom will require distribution centres within and across Australia.

Residential will continue to perform well, particularly in South East Queensland and in some regional and coastal areas.

Within the residential market, we’re starting to see lower degrees of rental vacancies. While this seems counterintuitive given the lack of overseas migration, what you tend to find is that in better times, many young people leave their family homes and begin renting, which drives vacancies lower. But in uncertain times such as last year (2020), they tend to return to their family homes, resulting in higher levels of vacancy. Since the start of this year, we’re seeing vacancies start to come down again as it seems renters feel more confident to join the rental market.

We are also seeing significant interstate migration into Queensland, particularly from NSW and Victoria. I believe that’s more a reflection of high house prices in those states than anything else. These interstate migrations, coupled with more people moving out of home as the economy recovers, are currently driving vacancies lower.

Key features within the residential property sector are:

• Price increases – which will lead to price and rent increases
• Low interest rates – also bolstering the return of investors
• First home buyer boost – growing interest in land sub-divisions for new home buyers
• Sea- and tree-changers – Moves to regional areas outside of big cities have been spurred by the work-from-home transition since pandemic lockdowns were introduced
• The eventual return of international migration – this will include overseas students returning at some point.

“Uncertainty and vacancies are not your friend”

Grant Mackenzie, senior portfolio manager, Freehold Investment Management

We allocate across the property universe, rather than at a sector level, which importantly allows us to select stocks that offer relative value under the current market conditions and outlook.

Currently, in a market where there’s volatility, increased uncertainty and vacancies are not your friend, we’re focussing on stocks with secure cashflows underpinned by long term leases. That’s where the relative value will come from.

Additionally, we’re investing in stocks at the quality end of the curve, which we believe will outperform second-tier companies at this point in the cycle.

Our portfolio investments that reflect Quality and long-term cash flows include Waypoint (ASX: WPR); Dexus (ASX: DXS) - high-quality assets; Goodman Group (ASX: GMG) – for the structural thematic; and Shopping Centres Australia (ASX: SCP).

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Make sure you "FOLLOW" my profile to be notified of the upcoming entries in this series. In part one, the contributors explained how their stock pickers were sifting the winners and losers in listed property. And in part three, our trio will each reveal a favourite property asset, or market, from their portfolios.