Spurred on by friendly government policies and generous tax concessions, the property sector is a perennial favourite of investors. But outside of buying houses and apartments, listed vehicles such as real estate investment trusts are a preferred method for investing in the asset class. As a broad sector, it’s commonly regarded as a defensive allocation due to the long-term nature of commercial and industrial leases, and the certainty this provides to owners.
But digging into listed property, the last 12 months have highlighted the distinctions between different parts of the sector. As lockdown measures were introduced to “flatten the curve," bustling cities became ghost-towns overnight as companies of all sizes shuttered their offices and workers bunkered down at home.
And on the retail front, while supermarket aisles remained busy during lockdowns, shops selling discretionary goods were largely abandoned. Large mall-owners Unibail-Rodamco-Westfield (ASX: URW), Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX) were forced to suspend rents, including with major tenants such as Super Retail Group (ASX: SUL).
In the first of this three-part series, we ask Grant Mackenzie, senior portfolio manager, Freehold Investment Management, how he identifies the most appealing parts of the listed property funds sector.
Rapid change sees “ugly duckling” become market darling
Grant Mackenzie, Freehold Investment Management
At Freehold, we have a relative value stock ranking process that considers the following:
- free cashflow;
- three-year growth and
- our estimate of intrinsic value.
In our view, it’s still too early to gauge the medium- to long-term impacts of the last 12-months on various property sectors. However, we do know the structural changes that were already occurring in the market are continuing to accelerate. For example, online retail has grown around 30% year-on-year, and that’s demand moving from brick-and-mortar retail. So there’s no coincidence that we’ve been seeing industrial/warehouse distribution centres in strong demand and big shopping centres really showing signs of serious structural challenges via cash collection, increasing tenant churn with increased vacancies and a constantly changing tenant mix.
It’s also too early to call the long-term impacts for the malls sector, given there are still plenty of headwinds ahead and much to play out. That said, we are yet to see any major transactions and expect further asset valuation declines.
For us, the challenge is to determine what factors are already priced in. We remain underweight malls and think the market is currently underestimating some of the long-term structural changes that are currently occurring in this space.
“Once the ugly duckling, the industrial sector is now the market darling”
We’ve seen that play out in stock prices, where the emergence of e-commerce has fuelled the massive demand (and prices) for warehouses and sheds. This is illustrated by the Blackstone portfolio that is being quoted at cap rates of between 4% and 4.25% - levels previously unheard of for this asset class.
Are these prices sustainable? We think they are for the short-term, given the amount of capital still on the sidelines looking to be deployed towards the industrial asset class, only reinforced by the demand for the Blackstone portfolio.
As for the Office sector, while it’s still too early to tell, we retain the view that the office is not dead. This will no doubt continue to play out over the next year or so, and while we fully expect vacancies to increase and effective rents to decline, in our view this is more than priced-in to many stock prices.
Source: Originally published by Glenn Freeman on Livewire Markets on 23 March, 2021.