Hermit crabs are soft-bodied and vulnerable crustaceans which are very dependent on their shells for protection. As such, they will only leave because they have outgrown their existing accommodation (ie shells) or for copulation.
For many years, Australian investors have benefited from investing in the local commercial property market, enjoying robust returns mainly from traditional retail and office sectors.
However, Australia is not immune to global macroeconomic and secular trends, including the Amazon effect that has almost decimated retail.
Like the hermit crab, the search for yield and the need for diversification will inevitably nudge investors to consider opportunities beyond the core sectors and markets.
Impact of the pandemic
The COVID-19 pandemic has certainly caused disruption to the property sector, as well as exacerbated some of the long-term trends.
Retail and office assets, traditionally forming the bulk of institutional investor portfolios face significant headwinds. While some office assets are holding up, the volatility in the sector is an unwelcome anxiety.
Industrial assets, spurred by the increased logistics activities supporting ecommerce, continues to perform well. However, concerns are being raised to the over-valuation of these assets vis-à-vis their quality. Nevertheless, these may possibly be mitigated by projected future rental growth.
In addition to the market changes, superannuation funds are subject to the recently legislated ‘Your Future Your Super’, stipulating performance benchmarks for the property portfolio. While the intention is noble, it further constrains the available levers to configure the portfolio.
Property Portfolio Construction
Facing these challenges, the investor needs to contemplate the impact on the legacy portfolio, with consideration to:
- Overseas exposures: US vs UK vs Continental Europe? Regions vs Cities vs Suburbs?
- Beyond Core: Core+ and alternatives? Sectors vs Themes?
- Access Channels: REITs vs unlisted; Direct vs Co-investments vs Funds?
- Capital structure: Real Estate Debt vs Equity?
Repurpose: The Rise of Alternatives?
Alternative real estate (or sometimes called niche property) have been quite prevalent in the US for a while, with such trends emerging in Europe. They may include living alternatives such as senior living or student accommodation; healthcare, life sciences and biomedical offices as well as technology and digital facilities.
Interestingly medical offices used to be classified as part of the traditional office category, but has since been repurposed and given a new lease of life!
With demand drivers that are less or uncorrelated the economic cycle, there a strong case for inclusion of alternatives to enhance the resilience of the portfolio.
While residential is seen by most as part of a traditional property portfolio, the dearth of this asset class with institutional quality in Australia deems it as somewhat alternative from the Australian investor’s perspective.
REITs’ Identity Crisis: Equities vs Property?
Hermit crabs are not considered true crabs, but are more closely related to squat lobsters, which are themselves not true lobsters.
Like the hermit crab facing an identity crisis, there is often the debate on whether REITs should be treated as listed equites or property. However the more pertinent question should relate to how it is being utilised in the portfolio.
For some, the liquidity of REITs allows investors to take advantage of the valuation lag between listed versus unlisted markets, while for others, it’s the ability to access niche opportunities. In certain geographies, the best quality assets are often held in REITs only.
However, large funds with internal capacity and resources may prefer to access assets directly in order to enjoy the benefits of ownership, control and importantly, fee management.
The jury is still out on the role of REITs in portfolio completion, as it depends on the total portfolio strategy of the fund and the role that property as an asset class fits in. The notion of a diversified property portfolio, or the extent that it should diversified, will defer amongst various funds. The advent of YFYS regulation will only add complexity to this decision.
Unlike the typical crab, abdomen of the hermit crab is not covered by an exoskeleton. To overcome this vulnerability, they creatively use discarded snail shells for protection.
Despite the uncertainty and anxiety fuelled by the ongoing pandemic, we hope to be as adaptive as the hermit crab, to embrace the changing environment. We look forward to a meaningful discussion on global property at this annual forum.Enquire about this event