Much has been written about global property in the last few months, most of it negative, but as I will argue in this article, not all property stocks are created equal. I am of the view that there are still lots of opportunities within the global property universe , however one needs to take active sector bets and purely choosing a passive strategy via a global property ETF would not be my recommended investment strategy.
Akin to how global equities have had very clear winners and losers in the last few years, global property has had a similar experience, with huge winners in certain sectors and major losers in others.
Looking at the winners of property , I was amazed to see that those who are thriving are the companies that are the landlords and beneficiaries of the digital disruptors, often identified by the anacronym FAANG ( Facebook, Apple , Amazon, Netflix and Google ).
I came to this realisation after interviewing some very smart global property fund managers , who run funds on behalf of Reitway Global , Schroders and Catalyst fund management .To a man , they identified the following real estate sectors as the potential winners of the future: Mobile Towers , Last mile logistics , Data warehouses, Storage ,Healthcare and certain residential properties . The majority of these rental opportunities are essentially predicated around the growth in technology . As the bar charts below show , the sectors that are leveraged to the digital economy have enjoyed strong returns in 2020 , whilst those that have seen their businesses disrupted by technology have suffered.
Looking at some of these sectors in more detail , their correlation to the technology disruptors becomes more obvious Starting with Mobile tower real estate investment trusts (REITS) – they have become more valuable as individuals remain glued to their screens, but also want faster connectivity ( think 5G ) and reliability. They have also done well in a world where working from home has become common place and, in some form, or another will be part of our future landscape ( especially for those of us who are fortunate enough to work online ). SBA communications is one such example and they are up over 20% for the year, not as much as Apple, but comfortably outperforming the S&P 500.
Then we have Last mile logistics, which has become incredibly popular thanks to e-commerce and the ever increasing need to get goods to clients ,as quickly as possible . The location of these logistics properties is very important as speed is relative to distance and hence the last mile logistic centres have become very valuable , especially near built up and densified urban areas.
The above chart is the percentage of people who think that 3-4 days is too slow for something to be shipped ( Source : Reitway Global )
When one thinks of logistics, one thinks of Amazon and Alibaba ,as these mega tech giants are huge drivers of e-commerce. If the price of Alibaba and Amazon is too pricey for some , why not invest in the logistics companies that rent out space , to help with their e-commerce activities . Prologis is one such example , with its focus being industrial logistical real estate and has benefitting handsomely from the growth of on-line commerce . This share is up over 12% for the year , also outperforming the S&P. The Covid pandemic has fast forwarded their expected growth in e-commerce demand, with the demand in the first 5 months of the year surpassing their forecasted 5-year demand numbers.
Data warehousing, another growth driver of real estate and aligned to the digital economy .Interestingly enough , it is the wholesale data warehouses that sell space to the FAANGs stocks that are best avoided as the power these behemoths wield will eventually lead to lower rentals going forward. One needs to rather be invested in retail central centric data centres in which rentals yields have more pricing power, as the land is closer to city centre and is more difficult to replicate further away. But regardless of location , the demand for data warehousing is only going to rise , as cloud-based solutions increase and consumers and companies store their data on the cloud
In analysing the sectors that will be disrupted by technology there is no denying that working from home ( WFH) is and will cause damage to the office rental market, due to the changing dynamics of the office work environment . I would argue that even in world where a vaccine is found and life returns to “normal “, our working life as we know it will not be the same as it was . No-one is saying that none of us will ever work from office again, but flexi time and an aversion to long commutes will mean that offices won’t have the occupancy numbers that they have has of the past . This will cause pressure on rental yields, as excess capacity will only be met by reducing rentals .
In the consumer world , retail rental had been declining pre Covid and Covid19 has just accelerated this trend , as consumers choose to shop online. Admittedly , consumers will still shop in the real world, but akin to the trends we are seeing in offices, it will be less than in the past.
But what about those investors who want to invest in real estate for yield ? As a number of these specialised real estate offering trading more like growth stocks , with low yields and a valuation multiple that rewards future earnings. When I asked this question of the mangers , there answer was that yield was dangerous , as future yields in the unpopular real estate sectors would probably tend to zero , so be very careful when buying high yielding payers.
To give one example second tier and third tier shopping centres will eventually go out of business and if they don’t rental yield growth will be a fraction of what is was in the past . This was happening pre Covid, as a number of countries in the world had a huge oversupply of retail space, it was not just ecommerce that led to this fall . In the words of one of the mangers I interviewed – “no price is low enough to invest in retail shopping malls in B grade and C grade retail malls ”
To conclude , the digital future is here now and the property REITS that embrace this new world will have a far better chance of achieving sustainable and growing rentals. Those that invest in the old economy will struggle to raise rentals , unless their properties are in areas that can be easily repurposed for this new environment . As I mentioned in the beginning not all property is equal, nor is it only retail and office space. The property sector is now offering more choice than it ever had before , but I would still recommend investing with a specialised property manager , who understands the different sectors and their particular growth drivers
Lastly , if buying the FAANGS makes you nervous because everyone loves them , then buying property stocks that offer investors a “real asset “ exposure to the growth of the FAANGs is potentially another solution