Property market challenges bring opportunity if you’re knocking on the right doors

Japan was the strongest market from a regional perspective for global listed real estate during Q2 as solid fundamentals combined with increased corporate governance and support from Warren Buffet in the market continued a positive momentum.

Elsewhere in Asia, after the initial euphoria of China reopening it’s fair to say the Chinese economy has been pretty lacklustre and Hong Kong markets are caught up in this.

Markets in Australia, New Zealand and the US performed relatively well with the reduction in inflation pressure and what that may mean for interest rate policy supporting those markets. In the UK stubborn inflation pressures may mean more draconian interest rate increases.

Office and Industrial intersect as data storage moves to the cloud

With Resolution Capital’s own office move in the Sydney CBD this quarter the team were able to confirm some things about the office market, according to Resolution Capital’s Global Portfolio Manager Marco Colantonio.

a. Flight to quality is evident where tenants are demanding well located buildings with good amenities, including end of trip facilities;

b. It’s a lot easier, as a tenant, to move these days due to the cloud rather than on premise IT servers/storage etc.

"For us it was important to have a building with high environmental credentials. And while conditions are tough for office landlords, if you’re looking for well credentialed,  environmentally sustainable buildings in core locations with good amenities there isn't a huge amount of choice and for those type of assets, landlords are sort of holding the line in terms of face rents."

The other side of the shift to cloud storage is the need for data centres. These have seen improving fundamental for some time now with vacancy declining and increasing landlord pricing power. We are seeing this in many of the data centre markets around the world. When you layer on the explosion of interest in AI and what that may mean for workloads and data centre demand over time, that’s really boosted interest in the data centre sector and supported performance over the quarter.

Bed, bath and Beyond delivers a litmus test for retail centres

US retailer Bed Bath and Beyond had 1,500 stores at one point and is about to throw 500 stores back on the market as part of the bankruptcy process.

Resolution Capital’s Global Portfolio Manager Julian Campbell-Wood explains what we are seeing is very strong demand for those ‘junior anchor boxes’ from retailers such as Off-price and Burlington. These ‘boxes’ are 2,500 - 3,000m: a similar size to a Woolworths.

“That demand really is evidence of what we have been positioning for in terms of the market fundamentals for open air shopping centres. You haven’t had a lot of supply since the GFC and that’s lead to vacancy being the lowest in 15 years. “

That’s feeding through into landlord pricing power – when you get these spaces back and they are in good centres, good demographic locations, then the demand is there for retailers to backfill.

And it’s important for landlords, it reduces their downtime, and they're seeing healthy spreads on the rents – so 20% to 30% increase in rents – evidence of the good healthy demand and that supply and demand dynamic for that shopping centre segment.

How REITs can take advantage of some of the disruption in the unlisted property market.

The freeze on redemptions in unlisted property funds that have been occurring over the last eight or nine months in the US have made their way to some retail funds in the Australian private market. The redemption queues arise due to the unlisted property funds lack of access to capital, or lack of liquidity in the transaction markets to sell assets at what they deem acceptable prices.

Julian Campbell-Wood explains that access to capital is a clear competitive advantage and the listed REITs are not dealing with the liquidity and redemption issues that the private funds are.

In fact some of Resolution Capital’s investee REITs (Prologis, Invitation Homes) have actually taken advantage of the redemption issues and they've secured big portfolios from some of these US unlisted funds that are trying to meet investor redemptions.

"It's reasonable pricing for assets that you may not get access to ordinarily and big portfolios – several billion dollars."

Watch Resolution Capital's full Q2 2023 investor update