REITs go through ‘structural megatrends’ as fundies pivot in different ways
Astute research and planning can reveal exactly where pockets of opportunity lie in commercial real estate investment lie, but prominent fund managers are reacting to legacy pandemic headwinds by either switching sectors within commercial property or reducing exposure to the asset class altogether.
While the work-from-home phenomena has played havoc with valuations, HMC Capital managing director and group chief executive, David Di Pilla (pictured, right), can see the positives for investors.
“As we sit here today in August 2023 it’s opportunity-rich for organisations that are prepared to look through the cycle and identify the right pockets of commercial real estate,” Di Pilla said on a recent industry podcast.
Di Pilla launched HMC in 2015 with an $800 million investment in 2016 into a portfolio of retail assets. HMC now has five funds (2 listed, 3 unlisted) and has become an asset manager in its own right after launching the HMC Capital Partners Fund in 2022. By 2023 the group reported $8.1 billion in assets under management.
According to Di Pilla, there are much more promising areas in the REIT sphere to work with than office rental space.
“What we’re looking for,” Di Pilla continued, “is areas that have got underlying income growth, year-on-year real pricing power and an ongoing tenant demand.”
As population growth forces people away from the major cities, Di Pilla sees tremendous growth in growing regional areas where services are highly valued.
This hunt has led the group to the retail healthcare sector, with its HomeCo Healthcare and Wellness REIT managing $1.7 billion worth of assets such as hospitals, aged care, research and child care centres. “There’s a structural megatrend going on there,” Di Pilla said.
“We think that ultimately real assets are about income yield, steady growing distributions that are non-correlated to the broader markets,” he continued. “But that doesn’t necessarily mean everything will perform in the same way. Structurally challenged sectors like, for example, office, that have no real pricing power and have got structural headwinds against them – they’re going to be tough areas to invest in so we stay right away.
Atchison Consultants principal Kevin Toohey (pictured, left) notes that the pandemic’s effect on office has been deeper than expected. While Covid-19 is mostly in the rear view mirror, the office sector still has enormous challenges.
“There was a feeling during the pandemic that the decline is demand for office space due to people working from home would be potentially offset by the need for social distancing in the office, which would necessitate less people working per square metre and force companies to keep the same amount of office space, even though there were less people on the floor,” Toohey tells The Inside Adviser.
“This didn’t really eventuate, however. As the need for social distancing has dissipated while work-from-home persists, we’ve seen persistently high vacancy rates in cities around the world.”
While HMC’s Di Pilla is switching lanes within REITs, other fund managers are choosing to manage risk by reducing their exposure to commercial real estate in more robust fashion. According to Atrium Investment senior portfolio manager Brendan Paul (pictured, centre), his team is “not really too enamoured” with the forward looking returns for commercial real estate.
“We think there’s some risk, and we don’t want to overlap those so we reduce our exposure,” he commented recently on Ausbiz.
“Over the last 12 to 18 months we’ve actually pivoted our private asset exposures away from the residential sector and largely away from the commercial sector, and more towards industrial-type exposures and agricultural exposures to give us diversification and make sure we’re not too concentrated in that area.”