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Property – the new frontier of thematic investing

How the oldest asset class in the world is evolving with the times
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Thematic investing has been among the most powerful and popular trends in the last several decades. The idea of identifying the next Apple or Amazon is one of the main reasons many people get into investing, and likely the biggest creator of wealth in recent history.

The last few months have reiterated that investing solely into share markets is not without its risk. Among the biggest beneficiaries of increasingly volatile share markets has been the oldest asset class known to humans: real property. While there are clear inflation benefits and a track record of growing income during the early stages of interest rate hikes, it is the diversification opportunity likely driving the growth in allocations to the sector. 

Asset manager Invesco has a dedicated Global Real Estate team that operates throughout Europe, Asia and the US, with a team numbering the hundreds assisting with the acquisition, improvement and disposal or commercial property all over the world. In a recent update, Invesco highlighted the significant evolution and innovation that is occurring in the sector.

  • While most people are familiar with the “residential, office, industrial and retail” framework of property markets, Invesco suggests this is somewhat anchored in the past and doesn’t reflect the massive changes occurring around the world. Property is “relevant to all of us in our day-to-day lives,” it says, but while our lives have changed significantly in the last two years, the approach to property has not.

    Invesco suggests a departure from the traditional approach, towards what it terms “CLIC.” This refers to the role of property in providing humans somewhere to Consume, Live, Innovate and Connect. In its view, property markets now need to be seen through a similar lens as other asset classes, as they offer the potential to be exposed to the most powerful societal and demographic trends, but with less equity risk.

    Rather than thinking solely in vertical property types, it considers the influences over varying types of property. In terms of the Consume theme, Invesco highlights that 60 per cent of developed market GDP still relies on the power of the domestic (particularly US) consumer. While the trend is towards online shopping, the “experience” of shoppers has grown in importance.

    Looking towards the future, Invesco sees some risk in fast-fashion and buildings with tenants that are vulnerable or easily replicable by internet competitors, but significant value in well-located logistics and fulfilment centres. US medical offices are also growing in popularity, a trend we are also seeing in Australia, while well-positioned and high-quality leisure assets are likely to be “immune from online substitution.”

    “Multi-family property,” known in Australia as “build to rent,” has struggled to gain traction in Australia, but remains a powerful asset class overseas, particularly given the evolution of the way we all work today. Work-from-home is quickly becoming work-from-anywhere, with Invesco highlighting that the “boundaries between where we live, work and play are being blurred. People are seeking more flexibility, better-connected homes and a shift in amenities, which is also coming at the same time as a structural undersupply of homes in key markets becomes ever more apparent.”

    The team sees value in the “efficient mass-market” housing opportunity, that is, well-positioned, higher-density accommodation in growing cities, but highlights that “some markets have experienced stretched affordability” and are therefore vulnerable to a turnaround.

    Innovation remains central to economic growth with Invesco’s research confirming that the “digital economy has grown 2.5 times faster than GDP” over the last 15 years, which may well be set to accelerate in the coming months. Life sciences, triggered by the pandemic, has become one of the fastest-growing parts of the innovation market, with Invesco attracted to the properties these businesses require.

    With “technological advancements continuing to support critical inflection points” like the ever-shrinking semi-conductor, cloud computing and artificial intelligence are showing now signs of slowing down. Invesco is a proponent of healthcare property, along with flexible office spaces located in “key innovation hubs,” many of which are now outside the traditional Silicon Valley and New York environs.

    Finally, the Connect theme refers not only to the need for human connection, but the need for access to and proximity to data. This is now a “critical component of corporate and social infrastructure” in a work force that is now highly distributed around the world. In this sector, Invesco focuses on connectivity and the accessibility of high-speed data connections within its buildings, but also in partnering with tenants offering these services. In an environment of growing uncertainty, consistent returns and lower volatility are clearly being prioritised, with property potentially adding some thematic exposure.

    Staff Writer




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