Three pure-play property trends you can't access in Australia

Mia Kwok

Livewire Markets

Why limit yourself to Australian real estate investment trusts (A-REITs) when there is a whole world of property you can invest in? Global REITS (GREITs) have a market capitalisation of over $2.6 trillion and tap into trends and growth opportunities from different economies.

Property plays can be seen as the 'picks and shovels' approach to a number of economic themes.

Interested in the rise of e-commerce? Invest in industrial assets. 

Want exposure to the increasing digitisation of the economy? Invest in data centres or mobile towers.

How about an asset resilient through a pandemic? Grocery centres, healthcare and self-storage assets are a winner. 

A recovery play? Shopping centres and office buildings. 

"It basically comes back to size and scale, depth and breadth of global REITs. The size of the investment universe is a lot larger and provides opportunties often not available here in Australia," said portfolio manager for APN Property Group Mark Mazzarella

There are just over 30 different REITs available for investment in Australia, compared to about 570 offshore REITs. The difference in market cap is stark as well. Australian REITs have a market cap of about $140 billion, compared with the near $3 trillion market cap of global REITs. While there are some REITs with a mix of exposures, Mazzarella is interested in finding GREITS with dedicated sector opportunities, or pure-play investments. 

His takes a bottom-up approach to investing in global REITs, albeit with a strong macro overlay. He believes that sectoral trends can dictate favourable market opportunities. 

Here are three trends he's identified which are unique to global REITs: 

#1  Increased investment in healthcare and medical research

Mazzarella describes healthcare as an "important and compelling" investment opportunity for two reasons. Firstly, an ageing population is a pre-COVID trend and therefore not bound to the volatility of the recovery and re-opening of the economy. Our population requires the infrastructure and services to properly cater to global ageing populations and this means medical clinics, hospitals, aged care facilities and residential care. 

But interestingly, Mazzarella notes healthcare is also being driven by a broader investment into life sciences, particularly highly specialised research and development laboratories. It's perhaps not the conventional "office" use case, but it will increasingly become so, says Mazzarella. Medical research and biotechnology are becoming a concentrated growth opportunity, and the post-COVID world will see a lot more investment in these areas. 

#2 E-commerce and logistics on the rise 

One of the most evident COVID property trends has been the transformation of industrial to the darling of the market. The rise of Amazon and the increased uptake of online shopping through COVID-19 has made industrial and logistics plays one of the most secure long-term growth trajectories of any other property asset class. 

"Before the pandemic, the North American transition to online retailing was more advanced than many other markets but it’s increasingly evident the pandemic has not only pulled forward future demand but also bought a new audience of shoppers online," he said. 

"This acceleration of recent trends is resulting in increased demand for space that we believe will persist, creating higher rental rates and new development opportunities."

"One example is our holding in Industrial Logistics Properties Trust (NASDAQ:ILPT) which owns a high-quality portfolio of logistics assets located the Unites States, with facilities leased to likes of Amazon, FedEx and UPS," he said. 

#3 Digital economy growth trajectory: data centres and mobile phone towers

Mazzarella refers to cell phone towers as "the road that everything travels down". As we become increasingly reliant on mobile communication and 5G technology, the demand for mobile phone towers is growing. 

Mobile phone towers are considered a property play in the USA, as opposed to an infrastructure play. Tenants are responsible for leasing the towers and supplying their own capex for technological upgrades, like the onset of 5G. 

Data centres are another strong play off the back of an increasingly digital economy, and Mazzarella notes that REITs invested in data centres and cell towers recovered fastest from COVID-19 downturn. 

"Those REITs that own mobile towers, data centres and logistics facilities recovered fastest and, in many cases, have seen the pandemic improve their market conditions and their prices exceed pre-pandemic highs," he said. 

How do you decide which GREIT is great? 

It's not enough to just identify the trends and buy into any assets in these sectors - trends are just the tip of the iceberg. Like stock picking, there's a huge amount of research that goes into the individual REITs and their capacity to deliver. 

"We take a bottom-up approach with a top-down overlay," said Mazzarella. 

"So those macro-type trends and sectoral trends are in the top-down sphere, and then the bottom-up is where we can get the best exposure at the actual portfolio level. 

From the bottom-up perspective, there are a range of things Mazzarella considers before investing in a REIT: 

  • Where are the assets located and in which markets? 
  • How favourable are the assets within the GREIT?
  • Who is the management team that oversees the portfolio and what is their track record?
  • What is the corporate and capital structure? 
  • What are the most resilient sources of rental income? 
  • Are there high-quality, well-capitalised tenants with secure lease covenants in place?

"We'll weigh all that up and make a call as to whether the returns, from an income and capital growth perspective, fit in with the objectives of the fund," he said. 

Conclusion

At the core of APN's investment decision-making process is a "property for income" philosophy, said Mazzarella. 

"We believe investors in the Fund can benefit from the relatively defensive, liquid, and real-asset qualities of commercial property as our strategy actively prioritises exposure to relatively defensive income-based returns," he said. 

Property is a reliable source of yield - a hard thing to come by these days - and has the added benefit of being a source of capital protection against inflation, said Mazzarella. More than that, he welcomes inflation with open arms. 

"Weak wages and economic growth have afflicted developed markets for years. If the return of inflation heralds the end of these two things, income investors should be relieved rather than worried," he said. 

His optimism comes at odds with recent fears that uncontrollable inflation spikes may be headed for markets, but he is in a comfortable position if it does. Commercial property, he reminds us, can provide a natural hedge against actual inflation ("not just the expectation of it," he adds). If commodities, materials and labour costs inflate sharply, up goes the asset replacement cost and the property investor wins out. 

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Mia Kwok
Mia Kwok
Editor
Livewire Markets

Mia Kwok is a former content editor at Livewire Markets. Mia has extensive experience in media and communications for business, financial services and policy. Mia has written for and edited several business and finance publications, such as...

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