For financial advisers and professional investors only – not for distribution to retail investors.
07 September 2023
By James Holliday-Smith
Core real estate assets are well placed in the current economic environment to provide defensive returns with exposure to structural growth drivers, according to Macquarie Asset Management’s recent webinar.
During the session, Macquarie’s experts explored the key megatrends and opportunities influencing real asset allocations – including a fundamental shift in real estate.
“Real assets tend to be defensive, and many have built-in inflation hedges,” explained Daniel McCormack, Chief Economist and Head of Research at Macquarie Asset Management. “These traits make them attractive in the current environment. When cyclical growth is more volatile or scarce, you want exposure to structural growth drivers.”
He noted that core real estate has delivered an average annualised return of around 6.5% over the last 20 years,1 and sectors with robust fundamentals and strong income growth are well-placed for the current macro environment.
With continued uncertainty for economic growth across most developed countries, three structural growth drivers are likely to provide opportunities for real estate returns over the longer-term: decarbonisation, demographic changes and digitalisation.
Decarbonisation is driving investment, with ESG now a consideration for property valuation.2 Demographic shifts – such as the emergence of lifelong renters seeking long-term ‘build to rent’ communities – are changing asset usage. And digitalisation is seeing eCommerce-led industrial asset growth as well as demand for data centres.
Macquarie Asset Management actively looks for sectors or stocks which are aligned with these structural trends – and are also well placed to take advantage of the current economic environment.
The following three webinar insights signal how these trends are likely to impact real estate investments in the next year, and beyond.
1. Residential markets stabilise, but the economic outlook is mixed
While McCormack said he expects a “synchronised developed world economic downturn,” it’s likely to be “mild” in the US, and Australia will emerge relatively unscathed.
“It’s not a fantastic global growth backdrop, but the Australian economy is outperforming the US and Europe. However, the Australian housing market is disproportionately exposed to floating rates as a high proportion of mortgages are variable – and consumer spending is slowing down,” he observed.
Source: Macrobond as at June 2023.
Source: Macrobond as at June 2023.
US consumer spending had held up thanks to a “war chest” of savings following the COVID-related fiscal support, and housing in the US market has turned around. “House prices have also stabilised in Australia, Canada and New Zealand. This speaks to the strength of the underlying demand for property,” noted McCormack.
US Housing on the turn
Source: Macrobond as at June 2023.
However, across the US and Europe, credit conditions are tightening, which impacts business and residential investment. The UK is likely to see an interest-rate driven downturn with very restrictive monetary policy still in play.
These economic headwinds are likely to exacerbate the underlying structural shifts away from traditional real estate asset allocations like office and retail.
“In the US, legacy commercial and retail property investments have shrunk to less than 20% of the investible universe, and new property types – like residential, storage and healthcare – are thriving and growing,” said James Holliday-Smith, Head of Australian Listed Real Estate at Macquarie Asset Management.
Yet despite this he noted, “Many local investors are still relatively underweight to these emerging asset classes, and Australia remains early in this journey.”
As an active investment manager, Holliday-Smith’s team seeks to benefit from dispersion in specific sector returns.
“On average, we see a 40% dispersion between the best and worst performing REIT property types – which is a great environment for generating alpha,” he said.
Dispersion in Sector Returns in Australian Listed Real Estate
Source: Macquarie Asset Management as at 31 May 2023.
2. Healthcare is emerging as a demographic winner
Healthcare is one example of a sector with strong potential, thanks to global demographic shifts.
“In Australia, as in much of the developed world, we’re seeing the impact of an ageing population,” explained Holliday-Smith. “About 2,000 people a week are entering the 65-plus cohort,3 and they are voracious consumers of healthcare.”
Macquarie Asset Management analysis of AIHW and census data suggests over 50% of those aged 65-84 visit the hospital every year – compared with just over 20% of those aged 15-64. And those aged 85+ spend almost six times as much on healthcare as their children and grandchildren.3
“The underlying payments for these services are backed by the Government, so it’s a high-quality rent stream that’s also pegged to inflation and is not economically cyclical,” said Holliday-Smith. He also sees an opportunity for investors to provide capital for new healthcare asset development.
Source: AIHW Data, Australian Census, Macquarie Asset Management.
Source: AIHW Data, Australian Census, Macquarie Asset Management.
3. Commercial likely to lose out to digitalisation
In contrast, office space is struggling with the accelerated shift to hybrid working and digitalisation.
“Employment numbers have gone up, but tenants are giving up space – we’re seeing vacancy rates grow in most major Australian office markets,” said Holliday-Smith.
Supply-demand dynamics are increasingly in the tenant’s favour, leading to generous rental deals. Only premium office space is in demand, while tenants vacate B-Grade properties – and telcos and financial services are leading the charge to a smaller commercial footprint.
NSW Unemployment vs Sydney CBD Office Vacancy
Source: Australian Bureau of Statistics, 2022.
As new property types emerge to meet demand from these three macro themes, the value of active management is clear.
“We believe the Australian listed real estate market is a great way to access some of these alternative assets,” said Holliday-Smith. And given the current economic outlook, with ongoing inflationary pressure and market volatility, the right real estate allocations can contribute to a strong defensive strategy.
Learn more about investing in listed real assets, including real estate
Author
1 INREV, ANREV and NCREIF, Global Real Estate Fund Index (GREFI), June 2023.
2 Australian Financial Review, UK property market now comes with a green premium, Jul 2023.
3 AIHW Data, Australian Census , Macquarie Asset Management.
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