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New opportunities in commercial property

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What is to become of all those office buildings and retail stores? They will be replaced, of course, at least in investor portfolios. The property sector is already pivoting to the new opportunities.

If there’s an investment sector which has more than its fair share of disruption due to the impact of covid-19 it has to be commercial property. And while big property managers, such as AMP Capital, have recognised the necessary portfolio changes, shifting allocations to new growth areas is not so quick and easy.

At an investor webinar on August 5, Luke Dixon, AMP Capital’s head of real estate research, and Chris Nunn, the firm’s head of sustainability and platform operations, spoke about the long-term implications of covid. There were five main themes underpinning commercial property’s prospects, Dixon said. They were:

    • record low interest rates, which are generally good for property returns
    • inflationary expectations, representing a bigger risk but one for which the income from property could be a hedge
    • a recovery in employment, helping both demand for office space and consumer spending for retail
    • strong investor demand, from both Australian institutions and overseas investors, and
    • an imminent economic recovery.

    Dixon said that the big services firms, such as banks and other financial services and law firms, started to see their businesses improve late in 2020 and increased demand for office space, especially in Sydney and Melbourne. Office vacancies had fallen since their peak in December, although they were still higher than in September and about three-times higher than the recent bottom in March 2020.

    He said that of the two main forces driving a real estate recovery, the demand side was still a bit slower but investment, which tends to move more quickly, was showing strong demand.

    “From a real estate pricing point of view, it’s very robust pressure,” he said.

    The “game-changing trends” in the sector included: surging demand due to e-commerce; workplace disruption due to work-from-home shifts; the adoption of new technologies such as artificial intelligence; a demographic swing to the millennials and “twilight” of the boomers; demand for healthcare services; and, the importance of food security.

    AMP Capital was moving to overweight positions in “structural sectors” such as towers, alternative housing and data centres and underweight positions in retail and office.

    Dixon said: “Office is bruised but not defeated. In Sydney, 60 per cent of office space is taken by the expanding services of banks, financial services and law firms.”

    AMP Capital is at about its neutral allocation to office of 30 per cent, indicating a hold strategy for 2022, but still well above the neutral 30 per cent mark for retail, at a current 50 per cent, indicating further sales. It is looking to increase logistics from a 20 per cent to 30 per cent weighting and alternatives from near zero to 10 per cent.

    Geographically, it is targeting small reductions in exposures in Melbourne and Adelaide; unchanged overall allocation to Sydney and Brisbane and slight increases in Perth and Canberra.

    The niche markets which the manager likes include logistics, where “we have never seen pricing this high”, Dixon says, and the “build-to-rent” sector, which eclipses both office and retail in the US commercial real estate markets.

    Build-to-rent developments include multi-family dwellings (blocks of apartments) data centres and “neighbourhood retail centres” which will often have apartments built over them.

    The manager has a carbon-neutral target of net zero by 2030, involving 60 specific targets set in 2019, and has already reached this goal with two of its property funds.

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