Listed real estate has returned to pre-GFC levels of correlation with the wider share market, according to James Maydew, who heads the asset class for AMP Capital.
On a visit to NZ last week, the Sydney-based AMP Capital head of global listed real estate said the easing of crisis-level monetary policies has seen asset class correlations return to more normal settings.
“In the GFC all correlations essentially went to one,” Maydew said. “But [with rising interest rates and quantitative tightening] asset class correlations are diverging again. Listed real estate has returned to pre-GFC correlations with the broader equity market meaning it’s a proper diversifier again.”
He said as well as diversification, listed property continues to provide the traditional benefits of yield and capital growth for patient investors.
“Listed real estate is a long-term asset class; it’s not going to give you high returns on a one-week basis,” Maydew said.
He said while some investors worry that listed property shares could be hurt by rising interest rates, the sector was in good shape to handle monetary normalisation.
“Listed property firms have much lower leverage levels than before the GFC,” Maydew said. “Most of them have also extended the tenure of their loans, locking in lower interest rates for the long term. They’re well-positioned for the inevitable rate rise.”
However, those broad concerns about the rate-sensitivity of listed real estate could result in some short-term volatility in the asset class, he said, such as the wobble earlier this year when US 10-year Treasury yields tipped over 3 per cent.
“Some investors sold [listed property] on the news but that was short-term sticker shock,” Maydew said. “Over the long-term property will reap the benefits of better economic conditions with higher rents and capital stability.”
He said in almost on 90 per cent of the occasions US 10-year Treasury yields moved higher US listed real estate delivered a positive absolute return while subsequently outperforming the wider equity market on about half of those times.
Admittedly, some property sub-sectors – such as real estate investment trusts (REITs) focusing on hotels – could prove more sensitive to rate increases.
“But they’re a small part of the market,” Maydew said.
The global REIT market has also evolved significantly over the last decade, he said, with investors now able to diversify further and access new growth areas in global property.
Maydew said the Australian and NZ listed property opportunity set boiled down to mostly “domestic retail and some office and industrial”.
“But in our universe we have an awfully long list of sectors including: data centres; storage; housing – both single- and multi-family; and, ‘manufactured housing’,” he said. “There’s many sectors that few investors outside the US are aware of.”
For instance, the German residential property REIT market has boomed over the last two-to-three years to represent a substantial part of the global index.
“But Germany was irrelevant to the benchmark just 10 years ago,” Maydew said.
At the same time, the rapid growth of an internet-connected global economy has boosted property demand from logistic firms and data centres around the world.
“We like logistics,” he said, including “exciting opportunities” in both Sydney and Auckland.
The ‘manufactured housing’ market was another interesting development in the US, Maydew said. Pioneered by US property mogul, Sam Zell, the manufactured housing concept – which essentially professionalises trailer parks – has been a high-yielding sector.
“There’s a high return on capital,” Maydew said. “Expenses are low – and so are rents but there’s capacity for them to rise.”
Last year just nine manufactured housing sites were built in the US, he said, as local councils generally frowned on them.
“But there’s rising demand for low-cost housing – including from the aging population and the ‘grey nomads’ who travel about in mobile homes,” Maydew said. “That’s positive for the sector.”
The evolution of the listed property market has enabled investors to shift away from the traditional emphasis on retail, office and industrial, he said.
“The frontier is expanding,” Maydew said. “And that’s attractive both for asset owners and fund investors.”
AMP Capital manages about A$6 billion of global listed property on behalf of retail and institutional clients.