Funds are going beyond the four traditional pillars of domestic real estate investment and embracing offshore opportunities to overcome gaps in the Australian market, a panel consultants has said.

While the core elements of a real estate sleeve are critical, panellists highlighted that problems with the current market – many pandemic related – were nudging canny investors towards opportunities in Asia, Europe and the US.

“Moving offshore is often under consideration, many have gone already,” said JANA head of property, Mary Power.

The four “food groups” of domestic real estate investment – retail, office, industrial and residential – are all problematic in some respect, Power explained.

“Retail has had some challenging times, we’ve seen a level of dispersion that has never been as apparent as it is today. I think there’s a 35 per cent differential between the top performing industrial fund and the bottom performing retail fund in the sector which is just unprecedented,” she explained. “With retail people are a little bit nervous.”

While Power thinks office will “be fine over a period”, she acknowledges debate around the current viability of the sector in light of the COVID-induced work-from-home trend. “There’s certainly a lot of debate around office,” she said.

“Residential in Australia is very underdeveloped and industrial is great but you can’t get a lot of it in Australia, you can [only] get some. ”

Picking the right assets

As the state of Australian real estate investment has become more problematic, international options have become more attractive. According to Mercer head of real estate Padraig Brown, the beauty of going offshore for real estate is that it doesn’t need to be done out of any necessity for diversification.

“Real estate can be five or 10 per cent of an Australian client’s portfolio, so you’ve got 90 per cent of your clients’ portfolio out of real estate and it generally is global, so you don’t need to be perfectly globally diversified in your real estate allocation,” he said.

The thing that matters, Brown reckons, is having the right team to help you pick the right assets.

“What’s important with your real estate allocation is to get it right, to make sure you’re getting cashflows which will grow over time and to have diversification of cashflows within your portfolio. When you’ve got that mentality then you can start looking for complimentary cashflows in different markets, elsewhere like Asia, Europe, the US,” he explained.

“In my years of building real estate portfolios and advising on real estate portfolios the investment decision is absolutely key,” Brown continued. “You’ve got to partner with the right managers, or if you’re doing it yourself you’ve got to have a very, very strong internal team.”

Selecting the right asset is key, Brown reckons, which obviously means refraining from purchasing “hot” sectors at the top of the market.

“No amount of asset management is going to turn around the returns of a poorly bought asset,” he said.

“Just focus on making sure that you partner with organisations or that you’ve got an internal team which will have you underwrite high quality assets and which will have the cashflows that you’ll need to get your return targets through,” Brown added. “Don’t be caught up in the latest fads… focus on the cashflow [because] they should be relatively boring at the end of the day; these are long term, cash generating investments.”

2021 and beyond

Each panellist had a different slant on what they were looking for in what has become a year like no other due to the pandemic that preceded it.

According to Frontier consultant Ben Woolley the long-term tip is healthcare, while Mercer’s Brown said his group’s focus is on non-discretionary retail.

“There’s a lot of opportunities that have opened up during Covid as retail has been maligned,” Brown said. “Non-discretionary retail in high density locations where you’ve got maximum potential is very attractive.”

For Power, everything is on the table in 2021.

“My only view is don’t have a blind spot anywhere,” she said. “There’s always an opportunity somewhere. Just keep an open mind on things and look for where the cashflows are.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
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