By: Philip Robotham
While higher interest rates may have weighed on valuations in the past couple of years, global investors should not forget that listed property exposed to major growth themes may provide an attractive combination of capital returns and real income.
Property investors can often benefit from rising inflation. In part, this is because rising costs of building materials or labour hold back new construction, making existing properties more valuable. But many types of property also have direct links to inflation.
Leases across all types of sub-sectors can have explicit commitments to rental increases tied to inflation. In some instances, leases have fixed “escalators” or rent reviews at specific times. These all give investors the opportunity to earn a real return; that is, one that is above inflation.
Specific supply and demand drivers are key
However, not all global real estate assets are the same. Investors need to pay close attention to the specific type of property they are investing in. Some types of real estate – housing, hospitals – are essential.
Others are benefitting from strong demand and limited supply, such as student accommodation, or data centres, for instance. We can gauge the growth of data centres by looking at power consumption trends, and they are certainly encouraging, to take one example of a property sub-sector which looks to enjoy strong future growth prospects (see chart, below for US trends).
In contrast, some sectors are both inessential and/or are experiencing weaker demand.
So, while the growth of e-commerce and working from home trends since Covid-19 has benefited certain industrial property segments like logistics, it has also weakened many retail and office sub-sectors. As a result, the “pricing power”, or ability of owners in these areas to pass on inflationary rent increases to tenants, has been severely impacted.
Urbanisation, however, has remained an enduring underlying structural trend and demand to live in cities is now at record highs with rents going up, benefiting the apartment sector, for instance. Indeed, sticky so-called “shelter costs” are one of the reasons why inflation in the US economy as a whole has proved so difficult to tame.
Interest rates quickly discounted in valuations of listed property
Investors can access these trends by investing in all variety of property assets, from self-storage to manufactured homes, to industrials and other of the fast-growing digital economy assets. Data centres certainly fall into the latter category.
Even prior to the mass adoption of AI (which relies on data centres to remotely host the required cloud computing processing and storage capacity) supply was struggling to keep pace with demand in major metropolitan areas.
The potential size of the data centre opportunity remains subject to fierce debate, but according to a recent McKinsey & Company report, forecasters estimate that total demand could hit 35 gigawatts (GW) by 2030 in the US, more than double 17 GW in 2022 (see chart, above).
Structural growth trends like these explain why listed property can provide a compelling option for global equity income and capital growth opportunities.
* Robotham is the head of intermediary at Schroders South Africa.
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