INVESTMENT PERSPECTIVES

Investment perspectives: the year ahead

In January 2022, the Australian Financial Review’s property editor Nick Lenaghan hosted a roundtable with some of Australia’s leading investment bankers to uncover their expectations for the year ahead. With permission, we share their views and enthusiasm for alternative assets.

How will a rate rise affect the property sector?

Valli Arunachalam, Executive Director for Real Estate Investment Banking at JP Morgan: The reality is that many investors had already factored in an eventual increase in rates from the ultra-low levels we had seen in the last 2-3 years and this is why the yield spread to bonds had been steadily increasing up until this year. Notwithstanding the normalisation in rates we are seeing at the moment, the relative returns generated from real estate are attractive by historical standards and should support valuations.

Tim Church, Managing Director and Chairman of Investment Banking in Australia at Morgan Stanley: The Australian REIT (real estate investment trust) sector was the best performing sector on the ASX with a return of in excess of 27 per cent. With the REIT sector being an interest rate-sensitive sector, we should not be surprised by this outperformance given that the RBA cut rates three times in 2020 to a record low official cash rate of 0.1 per cent, and it maintained this level for the entirety of 2021. So, does the old adage of “What goes up must come down” apply here and now to the REIT and broader property sector? Well, eventually yes – but in the medium term I don’t think this will be the case and the reversal could well take some time. When you consider the indebtedness of the federal government and the Australian household then rate movements are likely to be relatively subdued, so as not to cause too many adverse economic shocks to the consumer and households.

Rahul Bharara, Managing Director and Head of Real Estate Australia, Credit Suisse: My focus is on the real economy and the bounce we have been witnessing – a strong economy will invariably support rental growth and consequently outlook for real estate assets. Data supports the conventional wisdom that real estate performs well in an inflationary environment and inflation-linked rent escalations should provide some offset against rising debt costs.

Given the considerable upheaval across the sector from COVID-19, can we expect further adjustment to disruption in real estate?

Andrew Scade, Managing Director Co-Head of Real Estate Australasia for UBS: While further lockdowns appear off the cards for Australia (at least for now), tenant and consumer behaviours will continue to evolve as the situation with further variants develops. Hybrid working is likely here to stay and the continued ascendancy of e-commerce will continue to impact on both retail and logistics real estate. Bharara:I think it’s more a case of evolution than disruption in real estate. Real estate constantly adapts to the needs of tenants and end users. You only have to look back a few decades and see how office and retail space have evolved significantly since the 1990s – the pandemic has accelerated some of these trends, but there is plenty of evidence about the importance of physical space, which is being evidenced by activity across all formats.

How much more scope is there for capital accumulation in the alternates sector?

Scade:There remains considerable capacity for further funds or floats in the alternative real estate sector – the ASX remains dominated by “traditional” real estate asset classes and the US listed market presents an indication of where our market could evolve to in the future, with more than 50 per cent alternatives in the REIT index. Investor demand for alternatives is underpinned by strong and growing mega-trends, which are not expected to wane in the near term, and we would expect any IPOs in the alternates sector would be well-supported. Arunachalam:The prospects for IPOs and new unlisted funds in the alternatives sector is high. Ultimately, there are large amounts of capital on the sidelines from investors seeking increased diversification chasing relatively few existing funds/REITs with alternates exposure.

Bharara:The prospects for 2022 look good – significant capital is available for the right assets and good management teams from institutional, ultra-high net worths and traditional retail channels. Investors are actively seeking to diversify their real estate portfolios. Therefore, there continues to be strong demand for alternative asset classes that are under-represented in Australia. The key issue is achieving scale in emerging asset classes like self storage, data centres, build-to-rent, healthcare, life sciences and childcare, among others. Has the logistics boom peaked?

Bharara:Not from what we are hearing on the ground. The first part of the boom was led by declining cap rates, and now we are seeing rental growth coming through a number of portfolios. Logistic properties benefit from the demand for space from e-commerce and third-party logistics providers, which continues unabated. Arunachalam:No, I don’t think so. Industrial and logistics real estate will continue to be highly sought after due to its critical role in the increasingly omnichannel supply chain. We think there will be growing interest in last mile logistics facilities in urban locations based on the investor demand seen for these types of centres in the US and UK. Church:Whilst we have seen some significant yield compression in this sector over the last 24 months I believe the sector has plenty of tailwinds to keep it as one of the best-performing asset classes over the next few years. l

The use of this work has been licensed by Copyright Agency except as permitted by the Copyright Act. Originally published as “New year brings fresh opportunity for property bankers” in the Australian Financial Review on 6 January 2022.