Max Pacella
Investment Analyst
Macro & Markets
25 Mar, 2021

Global real estate is often used to measure the pulse of the real economy.

If it’s growing steadily, you can assume that there is a healthy level of consistent economic growth.
If it’s growing too fast, you risk having a ‘heart-attack’ (see Jesse’s note on property levels around the GFC).
If it’s flatlining, then pay close attention because that’s generally an ill sign for health.

Historically this measure has held up because ‘property’ covers a broad spectrum of assets; residential activity both from owner-occupiers and investors, commercial property amongst retailers and office space, freight logistics and storage amongst the industrial sector.

Given the broad nature of this asset class – and to follow on from our Infrastructure note on Monday – we will explore how different areas of property were affected throughout the global COVID-19 lockdown and what place property may now have in a diversified portfolio.

Property through COVID

Like most asset classes, property had winners and losers during COVID-19, largely reflecting which parts of the economy remained stimulated or grew as a result of the lockdown, as opposed to those which relied on the free movement and spending of the global population.

The below is a chart of the MSCI World Real Estate Index:  

Source: Bloomberg

The recovery from pre-pandemic levels seems to be steady, which the analogy from a few paragraphs ago suggests a healthy level of economic activity and growth. But does this mean that all property has recovered unilaterally since March?

Data would suggest, no.

During COVID, there were two broad sectors of property assets, the COVID-19 “defensive” and COVID-19 “affected” – industries that merely could maintain their value during lockdown, let alone benefit, did well whilst those that were directly impacted by a restriction of movement suffered.

To outline a few of the sub-sectors of the “defensive” property;

  • Industrial property assets (warehouses, manufacturing facilities)
    • Regardless of if you are selling products or equipment, they must still be stored, with manufacturing contracts often dated and produced long in advance – manufacturing is also too often associated with heavy goods, but it is also involved in everything from hand sanitizer to home office equipment
  • Data centres
    • With the increasing digitisation of the global population, particularly with the rise of Work From Home (WFH) trends and demand for telecommunications, data centres have been in heavy demand over the last twelve months
  • Self-storage facilities
    • Self-storage facilities (such as Kennards here in Australia) grew in demand over the global COVID-19 lockdown; some of this demand was attributable to people down-sizing their properties, keeping some items in storage as they moved away from city centres, or spending time ‘de-cluttering’ after being locked in their homes

The Bloomberg A-REIT/Industrial Property Index tells the story of being these three sectors defensive against the global lockdown better than words ever could:

Source: Bloomberg

On the “affected” side of this asset class, were the names you may have seen in headlines over the last year:

  • Office space in city centres
    • In the initial stages of lockdown, it is unlikely that major tenants of office space would have terminated their lease to shift to entirely WFH – the logistics and financial implications of this would be impractical. However, as time went on and businesses began to feel more pressure on their bottom line as they paid for empty office space, global vacancy rates began to dramatically rise.
    • Furthermore, as corporations (and workers) became used to and budgeted for the lifestyle shift to working from home, the market sentiment shifted to the death of traditional office space and “short-term leasing” (i.e. WeWork) in favour of hot-desking and week-on, week-off structures
  • Shopping centres and retail space
    • We have a skewed perspective in Sydney, where shopping centres and retail stores have been in the privileged position to maintain relatively regular operations, but globally the retail property sector is still recovering from a lack of foot traffic and restrictions on capacity
  • Seniors housing
    • Seniors housing has certainly been through a turbulent time during COVID-19; with an ageing global population and greater demand for quality healthcare, the sector should have structural long-term tailwinds, however the vulnerability of the elderly to infection meant that occupation rates fell globally – in the U.S alone occupancy rates fell 6.8% over 2020 (National Investment Centre for Seniors Housing & Care).

Location, Location, Location

The question is, where does property fit into a portfolio?

To return to our initial thesis, one potential way to follow property is to take a position on where the global (or local) economy is heading.

Depending on your regional exposure and overall macro view, this may mean you believe the global economy will as a whole come back online during 2021-22, and a broad property exposure is appropriate. If you believe that swathes of workers will return to their offices and visit shopping centres during their lunch break, then a more specific exposure would be appropriate.

Of course, the purpose of your exposure is also key to its place in your portfolio; the appeal of real estate for most Australians has developed from its ability to generate a regular income, however you may also see it as a way to achieve capital growth as the economy improves.

If an investor is looking for a more defensive, income-focussed allocation in their portfolio, then one exposure may be an industrial or commercial REIT/fund which focuses on distribution payouts from a set of predictable and long-term cash flows.

If an investor wants a more aggressive strategy, focused on capital growth in line with economic activity, then a residential property fund or listed property syndicate may suit that need more effectively –  it should be noted that globally there is more access to listed residential, since in Australia the build-to-rent model is generally considered too small to be a listed vehicle.

To conclude this broad overview, property is an area which most Australians are familiar with, but may not appreciate the characteristics or performances of its nuanced sectors over the last year.

Whilst it may be a worthwhile addition to a diversified portfolio, it is important to recognise what economic sentiment you’re expressing with an exposure to one area of property or another (or broad-based for that matter).

To give a tongue-in-cheek wrap up;

You wouldn’t buy a manufacturing plant to house your family in, nor would you store car parts in a two-bedroom apartment. Use that same common sense to determine which exposure to property you want to achieve.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.