Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 448

Property investing but not as most Australians know it

Against the hype generated by the local residential property market, the listed property sector is easily overlooked by Australian investors.

Both are forms of real estate which provide an important role for society and the economy with transposable land at their core. Global listed property, otherwise known as Global Real Estate Investment Trusts (GREITs), allows investors, large and small, to gain exposure to the returns of some of the world’s best institutional-grade real estate in a liquid form, managed by the world’s best-of-breed property management teams.

GREITs have delivered competitive risk adjusted through-cycle returns, including a prominent income component. The income component is supported by the fact that REITs have a legislated minimum dividend payout ratio in many jurisdictions.

Furthermore, GREITS can add diversity to global bonds, equities and unlisted property exposures. The chart below highlights the performance of global equities versus GREITs and other asset classes over a 25-year period.

There are also many GREIT sectors such as warehouses, data centres and healthcare facilities which are not highly correlated with the domestic residential housing market.

25-year total return composition to 31 December 2021

Source: Factset. GREITS: FTSE EPRA NAREIT Developed Index in AUD. Global Equities: MSCI World Index in AUD. Global Bonds: Bloomberg Aggregate in AUD.

REITs against a backdrop of rising inflation

Rising inflation and interest rate pressures top the concerns on investors’ minds right now. The narrative painted by the investment management industry has periodically changed, ignoring previously-held tenets in favour of a new way of looking at issues sometimes contrary to the prior views.

I started out in the industry back in the 1980’s when interest rates were at double-digits. At the time the narrative was ‘property is a hedge against inflation.’ When inflation started to dissipate and interest rates fell, the narrative changed to ‘property is a yield play.’

Now we are once again hearing concerns about REITs in the context of rising rates and inflation.

To say that REITs are highly affected by interest rates is a convenient catchphrase that needs to be properly analysed. Interest rates matter to all investments and the consequences are complicated. Critical examination requires consideration of real estate market conditions and the shape of the broader economy, in a nutshell supply and demand, as well as the extent of the sector’s financial leverage, i.e., debt levels.

Whilst long-term interest rates do effect the cost of capital, and provided there isn’t excessive property vacancy levels, a growing economy should drive higher tenant demand to compete for limited space. Landlords can increase rents at least equal to or greater than the higher costs. In addition, higher building construction costs also mean that competitive new supply is more expensive to develop as the ‘economic rent’ a developer needs to underwrite a new project increases. Hence existing building owners are afforded some buffer to the threat of new buildings.

What we can say is that good property is capable of delivering competitive returns in inflationary environments, provided the underlying property has certain key ingredients, namely that it is relevant to the needs of a growing and healthy economy, and that supply is constrained. The key ingredients we look for are attractive supply and demand characteristics that create pricing power, strong balance sheets, and quality management teams capable of extracting the most value from the underlying land and buildings.

The Resolution Capital Global Real Estate portfolio is currently focused on strong secular tailwinds which benefit from dominant trends such as the ageing population, housing shortages and growing household formation rates and the growth in digitisation and ecommerce.

Two companies enjoying favourable trends

Welltower Inc. (NYSE:WELL)

Seniors housing is benefiting from both cyclical and secular tailwinds. Aging populations along with moderating supply caused by COVID-19, rising costs, and less favourable construction finance provides a strong backdrop for existing landlords to grow rents and cash flows in the years to come.

Welltower is the largest diversified healthcare REIT in the US. Around 65% of its portfolio is concentrated in seniors housing.

Source: Greenstreet

Welltower’s balance sheet is strong with a net debt-to-EBITDA ratio of 6.5x, while management has impressively navigated through COVID in probably one of the hardest-hit sectors. Nearly all staff and residents are now vaccinated, and occupancy is recovering strongly following the initial COVID disruption.

Welltower is also expected to see occupancy recoup the 13% lost during the pandemic by the end of 2023, all the while growing rents above inflationary levels as prospective tenant demand for this demographically necessary housing format remains strong.  With strong tenant demand in the face of moderate new supply levels, Welltower we believe should enjoy earnings growth above 10% in the next couple of years.

Prologis Inc. (NYSE:PLD)

The e-commerce trend needs no introduction and it has led to demand for warehouses like never before. In the domestic market Goodman Group (ASX:GMG) has been a market darling. It’s a great business, but relative to Prologis, we believe Goodman is trading at an excessive valuation.

Prologis is a global leader in logistics real estate with a property and development portfolio spanning over 90 million square metres located close to major population centres across 19 countries. 

Changes in supply chain management should drive demand for warehouse space along two key thematical lines.

One, the ongoing reconfiguration of distribution channels to place greater emphasis on proximity to the end consumer. With same day delivery becoming more common, locations that minimise the cost and speed of distribution to the end customer are paramount.

Two, supply bottlenecks, symbolised by the record number of container ships that were seen sitting off ports around the world towards the end of 2021. This has led to the focus of supply chain management shifting from efficiency to resiliency, with a resultant increase in inventory levels stored in key locations.

Prologis is a beneficiary of these trends which are driving exceptional demand for warehouse space, resulting in record low vacancy rates and substantial rental pricing power, particularly in urban in-fill locations.

US logistics average asking rent % growth (year-over-year)

With a strong balance sheet and conservative payout ratio, Prologis generates surplus cashflow to re-invest in new development projects without relying on external financing. Combined with portfolio rental income growth in the mid-single-digit levels, Prologis is well placed to deliver earning per share growth of around 10%pa, demonstrating its ability to meet or exceed inflation.

An additional pillar of portfolio strength

Following the impacts of COVID and the responses by health authorities and central planners, we view the economy and capital markets to be somewhat distorted. While no investor can claim to be prepared for all the knowns and unknowns on the horizon, the need for effective portfolio diversification is vital. Current events in Eastern Europe further highlight the constant that uncertainties are ever present.

We see limited evidence of heightened risks specific to GREITs. In general, commercial property vacancy rates are not excessive, supply is moderate and new constructions costs are increasing. Furthermore, and as a generalisation, REIT balance sheets are sound with moderate debt levels and limited short-term debt maturities.

For many years, the GREIT investment landscape has been largely dominated by institutions. We hope this asset class will be considered by a broader range of investors as we give access to some of the world’s best institutional grade real estate. It’s global bricks and mortar … that just happens to be listed.

 

Andrew Parsons is a Co-Founder and Chief Investment Officer at Resolution Capital, an affiliate manager of Pinnacle Investment Management. Pinnacle is a sponsor of Firstlinks. Resolution has launched the only active GREIT Fund in Australia (ASX:RCAP).

This article is for general information purposes only and does not consider any person’s objectives, financial situation or needs, and because of that, reliance should not be placed on this information as the basis for making an investment, financial or other decision.

For more articles and papers from Pinnacle Investment Management and affiliate managers, click here.

 

5 Comments
Sal P
March 03, 2022

An interesting view CC. But does that argument stack up with all equities. For example, with BHP? When I look at BHP in my portfolio I see it as mines. I own part of them and am entitled to the profits those mines generate. I don't see any of my Portfolio as just tickers on an exchange.

CC
March 04, 2022

listed property does not behave the same as unlisted property though. that is what I meant.
I was once an owner of Centro Properties REIT shares and thought I was owning retail bricks and mortar. None of the actual shopping centres went broke but the company did due to bad financial engineering.

SMSF Trustee
March 05, 2022

CC unlisted can also be over-leveraged and badly managed. I think the distinction you're trying to make is between property funds (whether listed or unlisted) and direct ownership of individual properties.

Different vehicles perform differently.

You might be over-reliant on the Centro/GFC experience in making your observation about the buildings doing well but the vehicle doing poorly. Usually it's the performance of the asset that drives returns over time. There are a few shopping centre funds - listed and unlisted - facing headwinds right now, but you would be worried owning a shopping centre outright too.

CC
March 03, 2022

GREITs are as susceptible to equity market corrections as other stocks and some have financial engineering and overgearing. They are not bricks and mortar. They are equities.

Alex
March 06, 2022

Unlisted properties can be overgeared/overleveraged too though. The only reason it appears to be not susceptible to market corrections is simply because its price is not quoted daily on a public market. ?????

 

Leave a Comment:

     

RELATED ARTICLES

Why you can't invest in residential property on the stock exchange

Steve Bennett on investing in direct property for the long term

Reporting season winners and losers in listed property trusts

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.