Finding alpha in real estate: why sector choice still matters

Real estate investing often begins with a simple question. Where can investors generate genuine alpha in an asset class that is widely owned and deeply researched?

For Damian Collins, chairman of Westbridge Funds Management, the answer begins with understanding how property returns are created. Sector allocation and asset selection both play critical roles, but investors must get the broader market dynamics right before focusing on individual assets.

“Choosing the right sector is incredibly important because it gives you the tailwind that helps deliver outperforming returns,” he says.

Research from MSCI suggests sector allocation can account for between 33 per cent and 50 per cent of real estate outperformance depending on the stage of the cycle. The remainder comes down to asset selection, highlighting the importance of getting both decisions right.

Starting with the sector

At Westbridge, the investment process begins with a top-down assessment of structural drivers across property markets. Demographics, population growth and economic activity all shape long-term demand for different sectors.

Australia’s population growth remains a powerful tailwind. More people inevitably means greater demand for housing, logistics space and services.

“Population growth and demographics are fundamental drivers of real estate demand,” Collins says.

Investors also examine whether sector demand is growing faster than the broader economy. If a property segment expands faster than GDP, it can support sustained rental growth and asset value appreciation.

Technological change is another important factor. Remote work and artificial intelligence are reshaping demand across office markets. Vacancy rates in parts of Melbourne are approaching 20 per cent, and absorbing that surplus space could take years.

By contrast, industrial property continues to benefit from structural changes in retail and logistics. E-commerce growth and supply-chain shifts are increasing demand for warehouse and distribution facilities across major cities.

The sectors with structural tailwinds

These dynamics have led Westbridge to focus on sectors with favourable long-term fundamentals. Industrial property remains one of the strongest examples.

Vacancy rates across major Australian markets remain extremely low by global standards. At the same time, population growth and online retail continue to drive demand for logistics space. Each new resident also creates additional demand for distribution infrastructure.

Collins estimates that every additional Australian ultimately generates between three and five square metres of logistics space.

Retail property, meanwhile, requires more selective analysis. Some formats remain essential parts of the distribution chain while others face structural pressure. Neighbourhood shopping centres anchored by supermarkets continue to perform well because rental costs represent only a small share of tenant turnover. Large-format retail centres also benefit from relatively low operating costs and convenient customer access.

“Retail still plays a role in the distribution model, but the key question is how sustainable those rental costs are for tenants,” Collins says.

Why healthcare real estate stands out

Among the sectors Westbridge is currently investing in is medical real estate. The investment case rests on both demographic trends and recent market dislocations.

Australia’s ageing population is one of the most powerful structural drivers of healthcare demand. Older Australians account for a disproportionate share of healthcare usage, and that trend is expected to accelerate as the population ages.

Healthcare spending has historically grown faster than GDP, reinforcing the sector’s long-term growth profile. Recent industry developments have also created an entry opportunity for investors. Institutional capital has temporarily pulled back from parts of the healthcare property market, leaving fewer buyers active.

“Institutional investors have largely stepped away from the sector in the short term, which has created opportunities to acquire quality assets at attractive yields,” Collins says.

Medical property cap rates have expanded beyond long-term averages in some cases, providing entry yields that appear attractive relative to historical levels.

Defensive characteristics

Healthcare real estate also offers defensive characteristics that appeal during uncertain economic periods. Demand for medical services tends to remain stable regardless of broader economic conditions. Patients continue to visit doctors and specialists even during recessions, supporting consistent occupancy and rental income for landlords.

During the global financial crisis, healthcare property proved far more resilient than many other real estate sectors. Over longer periods, Collins notes that medical assets have delivered returns comparable to industrial property while exhibiting lower volatility.

“Healthcare assets tend to provide stable income because the tenants are providing essential services that people continue to use regardless of the economic cycle,” he says.

Asset selection still matters

Even within favourable sectors, Collins emphasises that asset selection remains critical. Not every healthcare property will deliver strong performance.

Westbridge focuses on modern medical centres located in supply-constrained markets and anchored by established operators. These facilities often combine general practitioners with complementary services that create integrated healthcare hubs.

The firm also prioritises assets where tenants have long operating histories and strong links to the surrounding community.

“You want assets with quality operators and tenants embedded in the facility, because that makes the income far more durable,” Collins says.

For Collins, generating alpha in real estate ultimately requires balancing macro insight with asset-level discipline. Sector tailwinds may create the opportunity, but the individual asset remains the decisive factor in delivering long-term performance.