Dislocation produces opportunity in commercial real estate

8th May, 2024 | No Comments

Market dislocation and bifurcation is creating significant investment opportunities for commercial real estate investors including superannuation funds, according to Mary Power, Principal Consultant at JANA Investment Advisers, who spoke at the recent Property Funds Association of Australia (PFA) Conference on the Gold Coast.

Ms Power said periods of uncertainty and change such as the current market environment provide fertile ground for investors. “The current environment doesn’t concern me, there are always opportunities in this type of market. Dislocation does throw up very exciting opportunities.”

She said sector allocations have evolved over last decade. “There has been growth in the office and industrial sectors, and a drop in retail over the last 10 years.

“Super funds have tended to invest in core holdings, with very little exposure to value-add or opportunistic investments since the GFC. New sectors are being added, particularly in alternate sectors not available in Australia.”

The challenge is working out where future returns will be sourced. “We need to be mindful on a forward looking basis on where the returns are coming from. For example, consider industrial property, which has grown its share of the real estate sectors from about 4% to 19% in the last 10 years – what is going to drive allocations over the next 10 years?

“Sustainability is a big topic. Ignore it at your peril. In Australia we are lucky property has measured relatively well, and there is a lot of momentum behind property assets with high sustainability attributes.

“Locally, there are potential opportunities in social and affordable housing, particularly following the government’s announcement of $10 billion for a housing future fund.

“Alternative sectors look attractive. Some of these sectors aren’t available in Australia so the superfunds are going offshore.

“For example, there’s an enormous capital appetite for data centres. Someone very wise said to me there is going to be a lot of winners and a lot of losers, so you need to be very careful when you put your money here as it’s white hot.”

Ms Power said Australian property has held up relatively well in a global context where re-rating across the globe has been uneven. “The re-rating across the property sectors has varied across different markets. We have seen the UK in particular re-rated much harder, and this could partly reflect the fact UK valuers have started to include sentiment in their valuations. The US has also experienced a more severe re-rating.

“Australia rates comparatively well due to transparency, and low leverage in the market. Leverage is a much bigger factor in other markets including the UK and USA. The interest rate differential is also a big factor helping Australia.”

When discussing strategic asset allocation across various asset classes, Ms Power said the superannuation funds still tend to favour unlisted property over listed property. “The average MySuper allocation to property is now about 8%, which is down a little from a previous average of 10%. This is pretty much all in unlisted, illiquid property.

“Super funds are currently holding about 23% in illiquid assets in total, which includes allocations to other illiquid assets such as private equity and infrastructure. Add private credit and it can be closer to 30% of holdings.”

Unlisted property remains a cornerstone for superannuation fund portfolios, offering inherent stability and lower volatility for securing sustainable long-term returns. Mary Power affirms, “Unlisted property is always going to play a major role in the superfunds allocations, given its much lower volatility than REITs, which is why super funds like unlisted so much.”

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