Despite mixed global economic signals, real estate remains a high-value investment for clients looking for defensive, income-generating assets. Additionally, global volatility means investors are focused on low-risk, stable, long-term returns, producing demand for this asset class.
Real estate delivers consistent returns when interest rates are at record lows. With tech disruption and a rising cost of capital impacting the sector, the challenge is finding growth assets. Additionally, investors are looking at alternative sectors or adjusting their risk appetite in the search for yield.
Assets respond to tech change
Technology disruption is impacting the performance of real estate assets and their values, and convergence of traditional real estate and technology firms is blurring what a real estate business is, so new entrants have an opportunity to disrupt the sector and steal market share. But landlords can counter this by providing new facilities for tenants and to expand the customer base.
Economic outlook stable, watch consumers
Victoria and New South Wales have strong services sectors and population growth, underpinning the office and logistics sectors. But retail should also benefit as services jobs’ wages rise. Queensland and Western Australia are showing signs of recovery, although Perth growth is still low.
The Australian retail sector is more resilient than the US and UK markets. With a smaller discretionary retail footprint, more services and convenience tenants, Australian retail, while not bullet proof, tends to weather structural headwinds better.
Nevertheless, this may not be the case given tech disruption and global economic transition. Office and industrial assets may provide stronger income returns through this transition period, however retail should offer solid returns longer term, after a repositioning period.
Office market well placed for strong performance in 2019
The Australian office market has benefitted from relatively low supply. Concurrently, changing economic conditions have affected the approach to real estate of corporate occupiers, so more offices are now becoming flexible in the way they provide space, services and experiences to tenants.
Experience and convenience the new drivers of shopping centre sales
Changing spending habits, rapid tech development and e-commerce is driving competition for the retail dollar. To counter the impact of online shopping, landlords are also changing shopping centres. More entertainment, food, beverage and essential services such as healthcare in centres are all part of this.
Industrial benefitting from disruption
Demand for logistics assets is underpinned by demographic change, undersupply and e-commerce. This creates opportunities for investors to develop and own industrial assets, offering a growing, stable income source.
Looking for growth and value
With asset scarcity and sharp prices, investors are on a global hunt for the next growth asset, prompting strong interest in alternative real estate investments like real estate debt, student accommodation, data centres and healthcare.
Real estate is linked to long-term, mega trends such as demand for aged care facilities. As such, alternative real estate assets are likely to become an even more important part of a diversified investment portfolio in the future.
Source: AMP Capital 25 Feb 2019
Author: Luke Dixon, Head of Real Estate Research, Sydney, Australia
Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.