Looking beyond the office doldrums for exposure to the world's best property

Resolution Capital

Resolution Capital

Concerns relating to the banking crisis in the US, and the cost and availability of debt has filtered through to the listed real estate market in recent months. 

The result has been general share price weakness following a solid start to the new year. Given that commercial real estate corrections have often accompanied (or indeed caused) bank crises in the past, it's not surprising commercial real estate and REITs have come under pressure. 

However, as a sector we don't see specific risks in excessive leverage by REITs, there's not excessive supply, and dividends are underpinned by some of the lowest pay out ratios in many years.

So, broadly speaking Global REITs are relatively well positioned to handle what is still a very uncertain macro environment. Further, the share price weakness also provides opportunity to build exposure to some of the world's best real estate assets at very attractive valuations.

The global REIT sectors and regions were opportunity presents

The Resolution Capital team invests in global real estate primarily through a property sector lens. 

This involves looking for the significant secular themes driving real estate returns, such as digitisation, the ageing of society, and residential affordability.

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Global Portfolio Manager Julian Campbell-Wood provided an overview of the overweight sectors currently in the Resolution Capital Global Property Securities Fund (Managed Fund) (ASX: RCAP) portfolio, in a recent investor update. 

"When you look at our largest sector overweights, it's necessity orientated retail, residential - particlalury in the US and Canada where there's an under-supply of homes, and some of the more economic resilient sectors such as healthcare and self storage.

From a regional perspective Resolution Capital's positioning outcomes are again a result of the team's investment approach which seeks internally managed vehicles and low leverage. 

"We have no exposure to Singapore, underweight to Japan and at the moment, given leverage issues in Europe we also have less exposure in that market. On the other side we're still finding good opportunity in the US, Australia, the UK and more recently we've increased exposure to Hong Kong," said Campbell-Wood.

The notable exception

A notable exception to the broader relative strength of Global REITs is the office sector. 

Also in the investor update, Global Portfolio Manager, Marco Colantonio, discussed the challenged office sector - one which the Resolution Capital Global Property Securities Fund (Managed Fund) (ASX: RCAP), remains underweight.

"The office sector is really the most challenged sub-sector of the real estate market, there is obviously the structural challenge of work from home and what that means for the long term demand for office space and now increasingly we're seeing some cyclical challenges as well."

While the RCAP portfolio is underweight office, Resolution Capital does not think we're seeing the so-called "death of office". 

The most pronounced trend in the office sector is a flight to quality. 

Newer, higher quality buildings are experiencing increasingly levels of demand, while older buildings and the less environmentally efficient buildings are baring the brunt of the office doldrums.

While office REIT peak-to-trough price declines in the recent cycle of 50-80% (almost in line with what we saw in the Global Financial Crisis) have dominated headlines, investors might be surprised to learn how small a portion of the global REIT universe office now occupies. 

Over the last 15 years, office has declined form about 20% of the Global REIT benchmark, down to around about 10% today. 

"We're underweight (office) and the great thing about Global REITs is there are other sectors that have grown in that time frame - such as industrial and healthcare where there's been more dynamic and interesting returns," said Colantonio.  

These are the Resolution Capital Global Property Securities Fund (Managed Fund) (ASX: RCAP) top 5 holdings at the end of Q1 2023. 

Prologis (NYSE: PLD)  Logistics
Invitation Homes (NYSE: INVH) 
Equity Residential (NYSE: EQR)

Realty Income (NYSE: O)

Public Storage (NYSE: PSA)
Self storage

Watch Resolution Capital's full Q1 2023 investor update

Learn more about the RCAP active-ETF here

Resolution Capital Limited ABN: 50 108 584 167 AFSL No. 274491. This communication was prepared by Resolution Capital Limited (“Resolution Capital”). The information in this communication is for general information purposes only. Information in communication is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This communication has been prepared without taking account of any person’s objectives, financial situation or needs, and because of that, reliance should not be placed on the information in this communication as the basis for making an investment, financial or other decision. Any opinions or forecasts reflect the judgment and assumptions of Resolution Capital and its representatives on the basis of information at the date of publication and may later change without notice. Any projections contained in this communication are estimates only and may not be realised in the future. Returns from investments may fluctuate and past performance is not a reliable indicator of future performance. Resolution Capital believes the information contained in this communication is reliable, however no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Resolution Capital Limited.

Resolution Capital
Real Assets Manager
Resolution Capital

Resolution Capital is a specialist global listed real assets investment manager. The highly rated investment team has over a 27-year investment track record and a disciplined investment process which emphasises a global sector perspective and a...

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