A moderately robust macroeconomic environment is supporting the demand for property, according to Quay Global Investors, with the best opportunities residing in sectors that are not readily available in the Australian market.
Quay principal and portfolio manager Chris Bedingfield said that historically, global real estate investment trusts (REITs) begin to generate outsized returns for investors in the lead-up to, and after, the first interest rate cut by the Fed.
“If history is any guide, and central banks begin to reduce interest rates, the global REIT sector is due for a bounce, supported by the relatively robust macroeconomic environment,” Bedingfield said in a recent market outlook.
“Long-term real estate security prices follow earnings, and earnings, in turn, are driven by rents and cashflows.”
With this in mind, he said Quay Global Investors is seeing promising opportunities in several sectors, including residential rental properties driven by a global housing shortage.
“Senior housing is another area where we see potentially strong growth along with shopping malls, as landlords mark rents up to better reflect economic reality and the strong inflation we’ve experienced in recent times.”
However, both globally and in Australia, population growth continues to create a growing supply and demand misalignment as central bank actions to curb inflation act as a signal for builders to stop building.
“We see this real time here in Australia, but this phenomenon is happening in other developed markets too, such as the US, Canada and Europe,” he said.
According to Bedingfield, the best part is the listed REITs that own these types of assets are trading well below where it is feasible to build new supply – giving investors great downside protection which offers medium-term upside gains.
Elsewhere, he added, as populations age, seniors’ housing accommodation is becoming more important.
“The sector is needs-based and relatively immune to economic conditions. And despite an expected surge in demand, net new supply is at a cyclical low due to high construction costs. We expect a rise in occupancies, enhanced pricing power and ultimately, more robust earnings growth from experienced leading senior housing providers,” he noted.
Another area where Bedingfield sees an upside is in the retail sector. Moreover, the recovery in in-store retail sales remains well above the pre-pandemic trend, with in-place rents still largely reflecting a pre-COVID-19 world, according to the investment specialist.
“As landlords continue to mark rents back up to economic reality where inflation is higher and foot traffic in malls remains robust, we expect good financial results from the best malls in 2024.”
Ultimately, Bedingfield said that global REITs have delivered handsome returns to investors and are likely to continue to do so.
“Importantly, REITs offer investors earnings defensive qualities as they achieve a high proportion of their returns from income sourced from rents, which provides a regular income stream to investors.
“Rents, too, are typically linked to inflation – a link which bonds and term deposits mostly lack. Listed property also has a low correlation of returns with those of other equities and fixed income investments over the long term.
“Reflecting this, global REITs have performed strongly for investors so far this century, as global real estate ranks in the top three asset classes nine times versus global equities (five times), and Australian equities (eight times),” he concluded.
