Warwick Schneller
The post-pandemic working-from-home trend and the impact of rising interest rates in many countries have focused media attention on what all this might mean for commercial property investment.
If you have listed property in your portfolio, this might prompt you to ask what you should do about that news. There are few issues to consider here:
First, the post-COVID working from home trend is not news to markets. Real estate investment trusts (REITs) focused on office properties have fallen nearly 25% since the start of 2022. By contrast, other REITs declined by only around 13% in that period.
Second, keep in mind that office REITs are only one segment of the market, accounting for just 8.1% of the S&P/ASX 300 A-REIT Index as of June 2023.
In offering exposure to many types of properties and structures, a broadly diversified strategy mitigates the impact of any one category and potentially provides more reliable outcomes for investors.
Third, the gradual drop in values in listed securities over 18 months reminds us that public markets offer the benefits of real-time pricing, transparency and liquidity. By contrast, owners of unlisted property often have to play catch-up by making sudden and dramatic devaluations. In this way, returns of securities with infrequently updated prices may appear less volatile than in reality.
Finally, for investors dismayed by recent REIT returns in general, history offers an optimistic note. While it has been a rough 18 months for listed real estate, with cumulative negative returns of around 17%, this same asset class over the past four decades has delivered average annualised returns of more than 9%.
All that adds up to there still being a place for property in a diversified portfolio.
By Warwick Schneller, Senior Investment Strategist and Vice President