Property Forum 2024

Complexities of Boom & Busts

Cicadas, known for their periodic emergence, lie dormant beneath the surface for years before surfacing in a burst of activity. Its life cycle is uniquely marked by periods of dormancy and resurgence.

Likewise real estate investment cycles embody a tale of resilience, adaptation and the potential for renewal. Understanding this analogy can provide valuable insights into navigating the complexities of the real estate market.

During prosperous periods such as the last decade of falling interest rates, investors awaken to the potential for growth, swarming into markets with enthusiasm. This phase is characterised by a cacophony of construction, rising property values, and economic vibrancy reminiscent of the cicada’s triumphant song.

Valuations & Dispersions

Yet as the inflation genie got out-of-hand, exacerbated by the COVID-pandemic and supply chain disruptions, the rapid rise of interest rates has taken a serious toll on the property market. Valuations on traditional core sectors of retail and office have taken a huge hit, with recovery not yet in sight. Interestingly, valuation dispersions remain persistent between listed and private markets, as well as US/Europe vs Australia.

Like the cicada’s eventual return to dormancy, real estate markets inevitably experience downturns. Economic challenges, market corrections, and shifting investor sentiments can lead to periods of quiet in the real estate landscape.

Preparing for the Cycle Turn

With central banks determined to bring inflation to their target ranges, property transactions have all but dried up, with investors waiting for rates stability. However, there is an expectation for the cycle to turn in the impending 12 to 18 months.

Nevertheless, it is during these dormant phases that the groundwork is laid for future resurgence, as the market recalibrates and prepares for the next upswing.

Beyond the traditional core sectors, there is increasing interest in value-added and alternative sectors. These strategies, some of which rely heavily on renovating, repositioning or even repurposing assets, could be a key beneficiary from the current economic environment.

With the end in sight, how should investors re-position their current portfolios?

The Case for Residential?

The living or residential sector, comprising student housing, aged care, built-to-rent (BTR), land lease communities, as well as social and affordable housing etc, presents a plethora of new opportunities in Australia.

While such sub-sectors are relatively well developed in North America and Europe, their emerging nature and lack of proven track record in Australia have drawn caution from local investors. This is in stark contrast to the Canadian and European investors which have readily embraced the BTR and student housing sub-sectors.

The jury remains out on the role of institutional private capital in affordable and social housing. Despite this sector hogging the media headlines due to the cost-of-living crisis, investors will struggle to make the investment case without a form of government subsidy or incentive.

Drawing on lessons in Europe, collaboration between investors, policymakers and communities is key to harmonising such strategies that promote long-term sustainability. Proactive measures, including adaptive urban planning and resilient regulatory frameworks, are necessary to create opportunities for growth and community renewal.

Implications for Portfolio Construction

The cicada analogy encourages a perspective that goes beyond the surface-level fluctuations. Real estate investors, much like cicadas, must anticipate and adapt to the cyclical and structural nature of the market, often driven by shorter term macro environment and longer-term demographic changes.

Understanding that periods of dormancy are not indicative of permanent decline but rather a necessary phase of renewal can guide strategic decision-making.

We look forward to a robust discussion at the 5^th annual [i3] Property Forum in 2024.

 

*We acknowledge the assistance provided by ChatGPT in developing this synopsis

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