Of nine major asset classes, global real estate has ranked in the top five asset classes for 13 of the past 17 years, and should play a larger role in Australian investors’ portfolios, says Chris Bedingfield, principal and portfolio manager with Quay Global Investors.
“Unhedged global real estate has been one of the best performing asset class since the turn of the century, delivering around eight per cent compound total returns.
“Over that same period, we have seen two US recessions, a European debt crisis and a 10 per cent appreciation in the Australian dollar relative to the US dollar, detracting from these returns – and yet it has still put in top returns.”
The sector also offers good diversification for Australian equity investors, having roughly the same correlation as global equities.
“Although Australians have a well documented love affair with local residential property, they could be achieving better, sustainable, long-term returns by looking globally.”
While there is a consensus interest rates are set to move into a tightening cycle, Mr Bedingfield says global property is not as sensitive to interest rate moves as many people believe.
“While interest rates do affect the performance of global REITS over the short term, over the longer term the impact is negligible.
“During the last interest rate tightening cycles in the US and in Australia, global real estate did not underperform; in fact during this period global REITs were a particularly strong performer, in part thanks to a strong performance from the US.”
He says factors that will drive long-term real estate performance are secular trends and macro/demographic themes.
“Quay looks to invest in opportunities backed by favourable macro/demographic themes. This includes the aging population, housing undersupply, knowledge-based trends, and the growth in e-commerce and technology.
“For instance, approximately 10,000 Americans turn 65 every day, and will do so until 2030; yet the construction industry serving this market displays all the traits of under-investment.
“Property opportunities which are underdeveloped and overlooked include hospitals, medical offices, life science, and nursing homes.
“Likewise, with rising housing unaffordability seemingly a global phenomenon, there is opportunity in global rental apartments, and manufactured housing.
“The ‘echo boomers’ – those aged 20-34 – have the highest propensity to rent with six out of every 10 doing so. Strong growth is expected in the rental sector for this cohort, right out to 2022.
“Meanwhile, there is an estimated 1.5 million young adults still living at home with parents. Clearly there is a growing need for accommodation, as purchase decisions are being delayed, and as marriage and household formation are pushed back to later in life.
“Yet US housing supply remain in check and there is little appetite to buy rather than rent. Residential construction in the US is only now recovering to pre-GFC levels, in stark contrast to Australia.”
Meanwhile, the knowledge divide, and the call for high quality education is driving demand for student accommodation.
“Student accommodation offers reliable and non-cyclical cash flow. This is a property sector that is largely recession resistant. Demand for education in the UK, for instance, continues to grow, outstripping supply near desirable universities, and has accelerated in the wake of deregulation in that country.
“The growth in e-commerce and technology is another key theme that will influence the shape of the economy in the future – and industrial and data centres offer good investment opportunities.
“These themes are generally less available in Australia, but they play a useful role in portfolio construction, and investors should consider ways to look beyond the obvious opportunities in Australia, in order to achieve better long-term, sustainable returns,” Mr Bedingfield said.