The question most relevant to global listed real estate at present is whether the pandemic temporarily or permanently changes the way the economy utilises real estate and/or simply reinforces pre-existing secular trends?
While this may be interminably complex, overall we feel it's more the latter. Through necessity, many of us have rapidly incorporated existing technologies to communicate and complete tasks, accelerating what otherwise would have taken several years to adopt.
The global listed real estate investable universe offers exposure to a wide range of underlying property types including emerging sectors such as life sciences, logistics, data centres and cell towers which are benefiting from ‘new economy' secular growth trends.
Another protected type of office space is life sciences, with properties benefiting from structurally superior tenant demand and landlords with specialist expertise in design, building specification and tenant management.
We believe life science demand will prove resilient in a slowing economy as pharmaceutical companies, venture capital and government programmes continue to support investment in cutting edge drug development, gene research and medical activity. Such office providers lease space to high quality and diverse tenants such as Pfizer, Moderna and Gilead, positioned in key clusters, such as San Francisco, Seattle, Boston and New York in the US for example.
Residential - the new office
A personal residence is a basic necessity reinforced by various levels of lockdown and the sector offers very low tenant concentration risk. As the WFH transition takes place, the demand for quality living quarters should continue irrespective of any rise in unemployment. Reliable services will be sought after and reputable landlords will attract tenants.
As other real estate sectors have suffered this year, rent collection in the residential sector currently remains high in excess of 95%, with very few tenant credit issues. Government stimulus has supported their ability to pay and landlords have been creative in helping tenants through this tough environment.
Residential continues to be our largest real estate sector exposure, principally in portfolios that own apartments and houses located in North America and Europe, with additional smaller positions in the UK and Japan.
The listed residential sector has grown in recent years and now offers a diverse range of exposures, from companies with large portfolios of apartments to companies focused on single-family dwellings. US single-family residential rental landlord, Invitation Homes, has a portfolio of approximately 79,000 single-family homes with an enterprise value US$23bn.
This part of the market is supply constrained, yet to recover fully from lack of development post the financial crisis and demographics support the potential as pent up demand from the millennial generation as they are likely to move toward single-family rental over the next decade. There are signs that preferences are already shifting away from denser housing options, with Invitation Homes experiencing their highest ever occupancy rate during the pandemic, steadily rising through 2020 to 97.5% in May 2020.
Time for school
Another interesting albeit uncorrelated component of the residential sector is Student Housing. Since March, our focus has been on trying to identify sectors that are likely to see only temporary dislocation of fundamentally strong long-term demand drivers. This has led us to investigate student housing REITs, where earnings have been impacted by the suspension of classes and disruption to international students. However, the market appears to be overly discounting the long-term fundamentals and the added pressure on universities to partner with private operators to help solve accommodation needs. We believe demand will recover robustly when lockdowns are relaxed.
Whilst the re-opening might take longer than expected, we view the impacts on student housing as temporary. We do not believe demand for higher education and the delivery through centralised institutions will change in the foreseeable future. Hence, share price weakness was an opportunity for us to establish positions in two of the leading listed student accommodation platforms.
Ultimately, we think investors will be best served by focusing on those areas of the real estate market which are best placed to thrive, if not survive, the eventual passing of the challenge. Secular trends we witnessed before COVID are unlikely to be altered/broken and in many respects have simply been reinforced. It is important to target strong balance sheets as they provide extra protection and durability.
To some extent the market is writing off 2020 as an unrepresentative, exceptional "lost" year, and that we must look to 2021 or perhaps 2022 when things return to normal. While we have some appreciation of this approach, for many of the stocks in our portfolio, we see this as being an exceptional year of opportunity and confirmation of the power of these real estate propositions in the new normal.
We continue to believe our portfolio is invested in high-quality real estate that is relevant to the secular trends in the economy. Pleasingly, the overwhelming majority of our investments have relatively strong balance sheets and are expected to pay distributions at least in line with 2019 levels.
The listed global real estate sector commands its place as a valid part of a diversified portfolio, due to a resilient income stream and tangible underlying assets. As long-term investors, we view short-term volatility largely as the price of liquidity, a cost more investors should be willing to pay given the challenges yet again facing many unlisted real estate exposures.
Andrew Parsons is CIO and co-founder of Resolution Capital and portfolio manager of the Nedgroup Investments Global Property fund.