Traditional ideas of the best performing real estate investment sectors in Australia are being challenged by a new study that focusses on risk-adjusted returns, forcing investors to rethink their strategies for income growth.
In Australia, investors have long favoured the traditional retail-logistics-office hierarchy. But, a new ranking exercise by JLL Research that looks at risk-adjusted performance has produced vastly different results.
The study places New South Wales’ warehouses ahead of every other asset class nationally, followed by Melbourne CBD offices, then ‘super and major’ regional shopping centres, for their risk-adjusted performance outlook.
Real estate returns are determined by a risk-free rate, plus an appropriate risk premium. A lower risk-free rate implies returns will be significantly lower.
The current ranking reveals returns that are 4 to 5 percent lower than the “eye-watering” double-digit performance the industry saw between 1994 and 2017.
Neighbourhood shopping centres are another strong performer across the country – coming fourth in the ranking, according to Andrew Ballantyne, Head of Research in Australia for JLL.
“Even taking into consideration the high level of volatility in the retail sector, neighbourhood shopping centres will still deliver strong risk-adjusted returns. It is a particularly defensive sector of the retail landscape with neighbourhood centres anchored by non-discretionary retailers,” he says.
The current divergence between asset classes and geographies across Australia would lead some market watchers to believe that “this is not a normal cycle”, Ballantyne says.
“We’ve seen a complete restructure in the value proposition of real estate and infrastructure, with sovereign wealth funds and pension funds increasingly attracted to low risk, long term investments.
“The message here really is that asset management skills will become more important for maintaining the performance of diverse portfolios over a long period of time, rather than just riding a cycle down with retail and logistics, which is what we saw between 1994 and 2007.”
John Talbot, Managing Director of Advisory and Consulting Services at JLL, adds that industry players that rely on simply leveraging general market confidence and flow of funds will struggle to compete.
“The best investors are those that can differentiate themselves from the pack by embracing superior asset management strategies to drive income growth, occupancy stability and smartly deploying technology to enhance the tenant experience
“Asset management strategies such as the use of technology to understand foot traffic and advise on tenant mix, can all boost asset value in this exciting period of innovation and differentiation.”
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