Property investors need to take stock and assess the current economic environment to ensure they are prepared to meet the challenges and opportunities the current year may bring. The year is destined to bring further uncertainty thanks to the Omicron variant, potential interest rate rises, federal and state elections, in addition to the ending of many government stimulus schemes.
In February 2022, Reserve Bank of Australia (RBA) Governor Philip Lowe flagged that inflation had picked up more quickly than the RBA had expected, but remains lower than in many other countries. The Central Bank’s forecast is for underlying inflation to increase further in coming quarters to around 3.25 per cent, before declining to around 2.75 per cent over 2023. In his update, Mr Lowe said the RBA Board is committed to maintaining highly supportive monetary conditions and will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. Further, he said the Omicron outbreak has affected the economy, but it has not derailed the economic recovery. The Australian economy remains resilient and spending is expected to pick up as case numbers trend lower. The RBA’s central forecast is for GDP growth of around 4.25 per cent over 2022 and 2 per cent over 2023. While nobody knows what the future holds, it is possible to look at the relationship between commercial real estate and inflation for insight.
Inflation and commercial property
Real estate demand has a large impact on real estate asset performance. High market vacancies can negatively impact rental growth, reducing the power of the inflation link for leases. However, higher quality assets typically have lower vacancy rates, longer leases and greater pricing power. Real estate demand can also shift over time. For example, in recent times the commercial market has seen some of the property submarkets perform well, including properties related to hospital, medical and industrial facilities. This can be contrasted with shopping centre retail returns, which were challenged by pandemic-related issues and compounded by structural, longer-term shifts in online retail growth.
During economic downturns, real estate can follow the negative performances of equities and bonds. We know that times of economic uncertainty can be concerning for property investors and we saw how many became spooked during such events as the GFC and 9/11. As a result, many liquidated their property portfolios and moved into other investments. However, in an economic recovery, real estate returns and values have historically grown in conjunction with the rebound in inflation. No doubt many would have regretted their decisions to liquidate their property holdings when the economy and market bounced back, and they were left on the sidelines.
We also know that property is considered one approach to hedge against inflation, given the asset class usually has little correlation with stocks and bonds. Investors choose to invest in real estate for the potential benefits of reducing volatility and potential risk. Commercial properties can be rented out via long-term leases that are adjusted for inflation, which can provide a hedge against inflation. CBRE’s 2022 Pacific Real Estate Market Outlook recently predicted that Australian superannuation funds could channel at least $68 billion into the commercial real estate sector over the next two years with immigration, capital flows, residential prices and commercial rent growth to be key market drivers. CBRE’s report also said that building on last year’s record sales of $50 billion, offshore investment is expected to remain a key driver. CBRE’s Head of Research, Pacific, Sameer Chopra said the numbers could be even larger if funds chase the inflation hedge offered by real estate.
Thinking of investing in property
If you are thinking about investing in property one option is via investing in a property investment fund which provides the expertise of professional investment managers. Quanta is an Australian property investment group with a proven track record of delivering enhanced returns from its property trusts. Our focus is on building our experience in the property market in order to achieve our investors’ goals. Driven by trust and opportunity, we use our collective property knowledge and capabilities to seek value-adding investment opportunities and actively manage assets to produce great returns.
All information in this article has been prepared for the purpose of general information only, without reference to any particular person’s investment objectives, financial situation or particular need. Potential investors should obtain their own professional advice before making any investment decisions. Neither Quanta Investment Funds Pty Ltd (ACN 657 780 928, AFSL No. 477075), nor any of its related entities or associates, give any guarantee or provides any assurance as to the performance of an investment in or the underlying assets of, the funds, the repayment of capital or any particular rate of capital or income return. Investments are subject to investment and other risks, including delays in repayment and loss of income and capital invested. Past performance is not a reliable indication of future performance. Nothing on this article constitutes an offer or invitation in any place in which, or to any person to whom, it would not be lawful to make such an offer or invitation. The distribution of this information may be restricted by law and persons who come into possession of it who are not in Australia should seek advice on and observe any such restrictions. Any failure to comply with such restrictions may constitute a violation of applicable securities laws.