Exploring long-term opportunities in real estate as we work through COVID-19

Investment markets have taken a hit during the COVID-19 pandemic, and real estate is no exception. But as we get a clearer look at economic data, local market dynamics and Australia’s position as a global leader in fighting the infection could present local and APAC markets with opportunity.

Our chief economist, Shane Oliver, often refers to the crisis economies and investment markets are in as a disruption. It is a true black swan event, rather than a result of excesses and indulgences being unwound, as they were in the 1930s before the Great Depression. In other words, the fundamentals of the Australian economy and its investment markets aren’t a root cause of the crashes we’ve seen in recent months.

We take a similar view with some key real estate markets, believing that a short-term disruption will make way for a mid to long-term recovery, as the economy normalises. Markets like office and retail have felt the pinch most harshly of a ban on gatherings, limits on non-essential travel and having the bulk of the population working from home. No matter how strong the long-term fundamentals, it’s understandable that this was never going to be a good short-term news story for those markets, as the government effectively required a reduction of foot traffic and workplaces to be temporarily emptied.

What might be less obvious amid this crisis are the markets that are tracking relatively well in spite of the pandemic, and in fact, have shown signs of long-term opportunity. Given the long-term nature of real estate investment, we believe this is important to keep an eye on.

First, in our view, logistics looks well positioned to weather the storm, and benefit from intensified supply chain demand. For example, one scenario we believe could play out to benefit logistics is a rise in inventory levels, as a result of customers assessing the sufficiency of their inventory volumes. Sudden events which disrupt supply can lead to changes in inventory practices, translating to greater demand for space. We’ve witnessed this in the past with natural disasters prompting a re-think of supply continuity. Another scenario which could benefit logistics is an accelerated e-commerce adoption, which the market was already responding to after a steady rise in global consumer uptake¹. The speed and depth of adoption here may increase further², fuelling further demand for warehouse and manufacturing space.

Macro-economic conditions are also a strong driver of real estate markets, and as it stands, Australia standing above its global peers. This gives us confidence in long-term outlooks and strength in a recovery period. For example, Australia and New Zealand top their OECD counterparts when it comes to managing the outbreak, well ahead of the UK and the US which are ranking into the 30s³. Further, of direct fiscal stimulus to sustain the economy, Australia has also provided the strongest of all the G20 countries.

Finally, at the broader APAC level, a picture is starting to emerge of how various regions worldwide will fare in recovery. While that is still evolving, currently, the Asia Pacific economies are set to outperform their global counterparts, delivering 1% and 8.5% growth in 2020 and 2021 respectively. See chart below.

An important consideration alongside these forecasts is that there are structural trends in the APAC region which we identify as supporting long-term growth. That is, our assessment of opportunity and recovery is not only based on COVID-19 recovery prospects. For example, migration is a key driver of economic growth and demand in local real estate markets. On that front, there are estimates about one million people per week move into Asian cities, with 19 of the UN’s ‘mega cities’ located in APAC⁴. While this is of course temporarily disrupted, the long-term trend remains. See chart below.

In summary, we continue to face headwinds in real estate markets, which we are proactively monitoring and managing on behalf of our clients. However, we also continue to see promise in markets which looked set to benefit from economic conditions before COVID-19. Now, under pressure, those markets are showing their positions of strength.

¹ https://www.emarketer.com/content/global-ecommerce-2019
² https://home.kpmg/au/en/home/insights/2020/04/coronavirus-covid-19-retail-survival-and-revival.html
³ Data as of May 6, https://www.ampcapital.com/au/en/insights-hub/articles/2020/may/the-lucky-country-three-reasons-why-australia-may-come-through-this-period
⁴ United Nations, AMP Capital

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