- JJL research reports five major themes in the investment market for 2021
- Investment market will provide diverse opportunities and risk in 2021
Real estate services firm, Jones Lang LaSalle (JLL) have released their official research report into the Australian and New Zealand real estate investment market for 2021.
The research claims that the uncertainty of the economic recovery caused by COVID-19 will present a diverse range of opportunities and risks for real estate investors in 2021.
More specifically, the report has explored five major themes for real estate investors to watch for (this article will focus on Australia).
Bond yields and return expectations
Due to the economic decline caused by the pandemic, this has created an expectation of an extension of the low-interest rate environment (the cash rate remains at a record low of 0.1%).
The Australian Government’s 10-year bond rate is forecast to remain below 1% through to 2024 and only move back to 1.78% by 2029.
Investors will form views in the appropriate risk-free rate and implied market risk premium for different sectors.
Some investors may be concerned that such unprecedented policy measures will be inflationary and cause interest rates to rise, while other investors believe the lower interest rates will prevail over the next decade.
Cross-border investor views on Australia
Australia is an attractive real estate investment destination for offshore capital sources due to historically strong GDP growth, liveability attributes that support population growth, transparent real estate markets, and low volatility of returns through the cycle.
The report’s figures show that when assessing population and GDP growth, Australia is attractive relative to other mature economies such as the US, UK, and Canada. Furthermore, Australia is ranked as having the 3rd most transparent real estate market in the world.
JLL conducted a survey of top investment leaders from 38 global and regional leaders on how COVID-19 is impacting their investment decision-making.
The results show a positive future for Australia, with 50% of investors looking to increase exposure, 43% to hold, and only 7% to lower their real estate holdings.
Evolving real estate debt capital markets
The report claims an opportunity has emerged for alternative lenders to become more active in the Australian commercial real estate lending market, due to the traditional domestic banking sector becoming more risk-averse and adopted more onerous lending criteria for the provision of real estate debt finance.
Non-bank lenders are becoming increasingly relevant to investors with short-term income issues, capital expenditure requirements, or development opportunities.
Non-bank lenders are exploring the potential to increase their allocation to non-listed real estate debt. This will create competition in the Australian market and allow for non-traditional lenders will grow market share.
The report estimates that if non-traditional lenders moved to a market share of 30%, this would imply a potential opportunity of $111.30 billion.
Real estate alternatives (which the report defines as all sectors with the exception of mainstream commercial real estate sectors of office, retail, and industrial & logistics) are found to be lowly correlated to economic conditions.
This makes real estate alternatives supported by long-term macroeconomic trends and provides portfolio diversification benefits.
The report has found mainstream commercial property sectors such as office hotels, retail, and retirement are pro-cyclical to economic growth. For example, demand for office space fluctuates with changes in white-collar employment.
Sub-sectors such as health and medical, student accommodation, and Build-to-Rent properties display counter-cyclical characteristics. For example, the demand for residential dwellings reduces in an economic downturn due to the population gravitating towards rental accommodation.
The report has found that Environmental, Social and Corporate Governance (ESG) initiatives will become more significant in the real estate sector, with the COVID-19 pandemic leading to a sharper focus on ESG criteria and investment.
Real estate investors are becoming more socially aware and investment managers are implementing corporate governance programs to ensure higher standards for integrity, responsibility, and propriety.
Failing to meet these standards negatively impacts the reputation of the real estate manager, and hence their ability to raise capital.
JLL’s full report, Australia and New Zealand investment market themes for 2021 is available to view online.