The continued attractiveness of Australia and New Zealand’s real estate markets for cross-border investors, helped by higher allocations to real assets and a portfolio re-weighting towards Asia Pacific, has been named as one of the five key themes which will dominate real estate investors’ minds across the region in 2021, according to JLL’s report.
The report “Australia and New Zealand investment market themes in 2021” revealed offshore capital sources would be encouraged by the expectation that Asia Pacific economies would recover more quickly than Western countries.
The other key themes defining the investment decisions regarding investors’ investment decisions in the region would be the rise of real estate alternative investments next to the evolution of real estate debt capital markets.
“There are a number of sectors where demand is not a function of economic factors (childcare, healthcare and data centres), so income streams are stable through the cycle. There are also some subsectors which display counter-cyclical characteristics,” the report reads.
“We have argued that real estate alternatives are less correlated with the broader economy. The resilience of most real estate alternatives sub-sectors was highlighted by high rent collection rates throughout COVID-19 and it has expanded the pool of investors seeking exposure to those sub-sectors.”
As far as real estate debt capital markets were concerned, the report pointed out an emerging opportunities for alternative lenders to become more active participants in the Australia and New Zealand commercial real estate lending market who were more open to taking on greater risk than traditional banks.
The real estate investable universe for existing assets in Australia and New Zealand was 60% equity funded and 40% debt financed.
“To understand the depth of opportunity for non-bank lenders, we reviewed a range of market share scenarios. If non-traditional lenders moved to a market share of 30%, that would imply a potential opportunity of AU$111.30 billion in Australia and NZ$15.90 billion in New Zealand,” the firm said.
Also, the COVID-19 pandemic had led to a sharper focus on environmental, social and governance (ESG) criteria and investment given their positive influence on long-term return and risk profiles and the fact that real estate investors were becoming more socially aware in investment decision-making and considering the social and societal implications of each investment opportunity pursued
The report also said that Australia and New Zealand were historically viewed as higher growth / inflation economies with Government bond yields above the US, UK and Japan in the 1990s, 2000s and the period through 2015. However, more recently, bond yields converged across mature economies with important implications for asset pricing.
According to JLL, in 2020, retail and to a lesser extent office sector valuations were negatively impacted by income risk and a reduction in short-term rental growth assumptions.
The firm said that one of the legacies post COVID-19 was the expectation of an extension of the low interest rate environment. At the same time, the Australian Government 10 year bond rate was forecast to remain below 1.00% through 2024 and only move back to 1.78% by 2029. The same security in New Zealand was expected to follow the same trajectory, remaining below 1.00% through 2023.
“Over the long-term, we have observed a close relationship between property market discount rates and government bond yields,” the report said.
The performance of FTSE Australian Government Bond index vs. S&P ASX 100 Real Estate Index over the year to 30 November, 2020
On top of this, listed investor confidence in COVID-19 exposed sectors (office, retail and hotels) led to a strong rally in unit for those vehicles and a significant narrowing of the discount to NTA.
“We expect this confidence to flow through to direct real estate investors. While the share market rally may reduce the motivation for some A-REITs to be motivated vendors, we believe that portfolio re-weighting will remain a relevant theme for A-REITs and unlisted funds in 2021.”
The performance of the ACS Property Australia Direct sector vs. The ACS Property Australia Listed sector over the year to 30 November, 2020
