ASX listed and unlisted companies investing in commercial property have weathered the pandemic better than many analysts had forecast.
In fact, some have broadly outperformed the 8% gain delivered by the S&P/ASX 200 Index (ASX: XJO) in 2021 to date.
Despite the headwinds battering the Aussie office markets as many workers continued to work from home this year, the Centuria Office REIT (ASX: COF) has gained 5% in 2021. Atop the share price gain, COF also pays a 7.4% trailing dividend yield, unfranked.
The Centuria Industrial REIT (ASX: CIP) has seen strong ASX investor demand, gaining 19% year-to-date. CIP pays a trailing dividend yield of 4.6%, unfranked.
As for Centuria Capital Group (ASX: CNI), which runs the above 2 real estate investment trusts (REITs) as well as investing in unlisted healthcare and other commercial property assets, its share price is up 22% since 4 January. Centuria pays a 3.2% trailing dividend yield, 38% franked.
With these figures in mind and an eye on the year ahead, the Motley Fool turned to Centuria Capital Group's head of funds management, Ross Lees, for his insights into Australia's commercial property markets.
Motley Fool: What's your take on how the office market performed in 2021?
Ross Lees: Despite the backdrop of the pandemic, Australia's office, industrial, and healthcare markets have all performed quite well.
The domestic office market has been resilient, which has surprised most in the investment markets. In fact, the volume of office transactions throughout Australia during the January to September 2021 period was roughly double that of 2020 during the same period.
There have been a number of high-quality transactions in both the CBD and metropolitan markets during this year, especially for those assets underpinned by quality tenants and providing predictable income streams and long Weighted Average Lease Expiries (WALEs). This tells us there is strong investment demand.
On the office leasing front, in spite of the lockdowns and prevalence of work from home patterns, in late 2021 we've seen an uptick in office leasing enquiries. This has been backed by the wider, positive rhetoric from corporate leaders who have a greater expectation that staff will increasingly return to the office for work, particularly from the beginning of 2022.
MF: And how did the industrial market do this past year?
RL: The industrial market has been the standout performer among real estate asset classes in 2021. We've seen landmark portfolio transactions and an insatiable demand, from domestic and offshore investors, wanting to increase their exposure to the Australian industrial sector.
The strong investment appetite is complemented by tangible evidence of rental growth, especially within the east coast markets. In some markets, such as the prime Sydney industrial market, yields are now comparable with global markets.
Demand is most dominant within infill, urban markets where occupiers, especially e-commerce operators, are seeking more space close to densely populated areas in metropolitan regions so they can move their goods to consumers more quickly. We refer to this trend as 'moving from big trucks to white vans'. That is, consumers want their online purchases to be delivered sooner so the logistics sector deploys smaller vehicles more frequently.
MF: Rounding out the list, how did healthcare assets stack up in 2021?
RL: On the healthcare front, 2021 has seen a significant increase in investment from the institutional sector, especially among those looking to diversify their portfolios into alternative markets.
The challenge for investors is the higher barrier of entry into healthcare real estate. However, the underlying metrics of Australia's ageing population and increased healthcare costs continue to support investment demand for high-quality healthcare property into the future.
MF: That covers the year almost gone by. Looking ahead, what can ASX investors expect from the office, industrial, and healthcare markets in 2022?
RL: The obvious noise in the market is centred around inflation moving through the financial system and what this could mean for increased interest rates and bond yields; most especially, how they affect capitalisation rates in the real estate sector.
Notwithstanding, most ASX investors easily overlook the fact that real estate has historically been considered a hedge against inflation. Should inflation come through the system, there is a risk of an increase in the cost of building and creating new supply across all property sectors. The outcome is likely to result in rising rents.
Centuria expects consumers to continue the accelerated adoption of e-commerce, increasing the demand for industrial assets from occupiers. During 2022, we also expect workers will return to the office, particularly among the major corporates, which will dispel the perceived negativity associated with the office sector.
We also believe there will be increased demand within decentralised office markets, which lend themselves to better worker commutability, particularly for assets within close proximity to public transport infrastructure and main road arterials.
Modern assets with high ESG [environmental, social and governance] and sustainability credentials are also expected to attract high-quality corporate tenants as well as investors.
MF: How is Centuria positioning itself to take advantage?
RL: Over the past 5 years, Centuria's position has actively and rapidly shifted to the logistics and healthcare sectors. We have significantly expanded our market share in these sectors, growing our portfolios, which are backed by expert management teams with a high degree of specialisation. We are capitalising on the opportunities in these in-demand real estate sectors to deliver compelling returns to our investors.
Centuria has a considered, long-term approach to its investments and operations. We've expanded into sectors by executing on robust corporate strategies rather than by short-term, knee-jerk reactions. We've identified the opportunities and advantages of the industrial, healthcare, and decentralised office markets and will continue to expand our portfolios within these asset classes to deliver value to our security holders.
