The housing market may be in meltdown but there's still plenty of opportunity in property
Centuria's Jason Huljich on why real estate is still an attractive asset class even as residential property enters a downturn.
Add us as a preferred Google source
According to many market commentators, the sky may be falling on the Australian residential property market. A perfect storm of macro headwinds - rising rates, inflation, substantial tax and policy changes - have seen house prices fall and arguably made residential property a much less attractive investment.
For investors that still want exposure to one of Australia’s most popular and enduring asset classes, are there opportunities beyond residential?
According to Jason Huljich, joint CEO of Centuria Capital Group, says there's still plenty of potential tailwinds for the wider real estate investing market.
The tailwinds for real estate
Huljich has identified a number of macro developments that are serving as drivers for opportunities in property outside residential:
Inflation and rental income
Stubborn inflation may be a headwind for residential property in terms of rates rises, but can be a positive for other property sectors that work as an inflation hedge.
"Many leases, across different traditional and alternative property sectors, include CPI-linked annual rental increases," said Huljich. "Where leases are CPI-linked, higher inflation can translate into higher rental income over time, helping to offset increases in interest and operating costs."
Limited new supply
It has been a contributor to Australia's housing boom and supply constraints continue to be a tailwind for residential and other property classes.
"Elevated construction and financing costs can reduce new development activity, which may support the relative position of well-located existing assets," he said. "Where occupier demand remains steady, resultant of population growth and business formation, constrained supply can support increased rentals and long-term values."
Defensive, needs-based assets
A rising demand for infrastructure for new and existing services is also serving as a driver for specific parts of the property market, as does the AI buildout.
"Sectors aligned to essential services and everyday consumption, such as healthcare, daily needs retail, certain logistics and cold storage, can demonstrate greater demand resilience throughout a typical property cycle," said Huljich. "Digital and work-enabling infrastructure, including data centres, also continue to be an important structural theme with strong tailwinds."
Supply chain resilience and onshoring
The broader theme of domestic resilience and deglobalisation also serve as a boon for parts of the industrial property market, says Huljich. "Efforts to diversify supply chains, hold higher inventory levels and increase domestic production can support demand for industrial and logistics facilities, particularly in well-connected locations."
Selective value-add opportunities
While price drops are happening across the residential property sector, there's also been similar movements elsewhere, which means there can be value on offer.
"Periods of tighter credit and heightened uncertainty can create opportunities to acquire quality assets at more conservative pricing," said Huljich. "The determining factor, however, remains on the quality of the asset."
Tenant quality and diversification
Centuria has also found success targeting tenants with longer-term outlooks, and they now make up more than 80% of its portfolio.
"Resilient tenant profiles, including government departments, listed entities and national organisations, can help support income stability."
Why investors should look beyond residential
It's no surprise to anyone that retail property investing in Australia has followed a well-trodden path, with residential buy-to-let (BTL) far and away the most popular investment for "mum and dad" investors.
"Usually, one or two homes would be bought and the mortgages covered by rental income, with an expectation of a capital gain after several years of ownership," said Huljich.
But he says alternative investment types can offer more predictable outcomes.
"Unlike residential BTL assets, commercial funds have longer lease terms with stronger tenant covenants. The tenants are also responsible for repairs and maintenance and often property management fees. Conversely, for BTL properties the owner is responsible for these costs."
That can take the form of direct investment, unlisted or listed funds, with unlisted commercial property funds a key focus of Centuria. According to Huljich, they offer the following characteristics that set them apart from residential buy-to-let:
- Long term leases (3-10 years).
- Higher quality tenants, for example, institutions, government departments, ASX listed entities and multinational corporations.
- Tenants pay for repairs and maintenance, and often the property management fees.
- Owned on average between five and seven years.
The best opportunities right now
Industrial
Huljich says Centuria has targeted "urban, infill industrial assets", which have situated close to densely-populated areas and with hard limits on land supply. For investors, they offer durable revenue and demand.
"These markets have provided stronger occupier demand and, therefore, higher rental values," he said. "They also have a lower vacancy than fringe industrial markets with abundant land supply."
"Inner urban markets also lend themselves to last mile fulfilment meaning goods can be transported to consumers or businesses in a short period of time. This is important in the context of rising fuel costs as transport and logistic costs comprise a significant proportion of occupier’s overheads and operational expenses."
Office
Office remains a key opportunity, according to Huljich, but investors need to be selective.
"In recent years, there has been a bifurcation in Australian office markets where modern, sustainable buildings attract stronger tenant demand, generating higher occupancy, WALE, rental values and valuations," he said.
The opportunities also aren't equal across the country.
"From a geographical context, not all markets are the same. Sydney CBD, Brisbane CBD and Brisbane fringe markets are performing well while the Melbourne CBD continues to be challenged."
Agriculture
Centuria also have high conviction in Controlled Environment Agriculture, says Huljich, which predominantly involves glasshouse assets.
These assets present specific advantages to standard broadacre holticulture, most pertinently improved yields, year-round production and protection to adverse weather conditions.
According to Huljich, they also offer certain investment fundamentals including long leases, predictable revenues and favourable contracts with Australia's supermarket giants. There's also a predominance of net and triple-net leases, which means operators take on the much of the maintenance and upkeep.
The outlook for Australian residential property remains uncertain, but there's still opportunities on offer elsewhere in the real estate market that can offer many of the qualities investors seek from the residential market. As with anything, it's just a matter of understanding the role a specific investment can play in your portfolio.
"As with all property investments, it is also important to consider the specific characteristics and risks of each property, be it commercial or BTL, along with structural aspects such as the level of gearing required to produce the investment yield, liquidity and the like."
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance.
He has previously worked at Finder, FourFourTwo and Man Of Many covering everything from film to football.
He has a Masters in Media Production and a Bachelor's in Journalism.
........
Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.
1 topic
1 contributor mentioned
Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering...
Expertise
Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering...
Expertise
Comments
Comments
Sign In or Join Free to comment
most popular
Buy Hold Sell
Buy Hold Sell: 6 ASX large cap leaders and laggards
Livewire Markets
