Navigating real estate investing in the face of inflation

Scott McKenzie is managing director of unlisted commercial real estate fund management company PMG Funds.

OPINION: Inflation rarely brings good news to investors, but that doesn’t necessarily make it a bad time to invest.

At times like these, when investment objectives shift from growing wealth to simply protecting it, fund managers will talk about increasing exposure to defensive assets – sectors or companies. who are positioned to survive and thrive during difficult times.

As a physical investment, real estate is often viewed holistically as a defensive asset class. But it’s important to understand that within the overall real estate industry, not all opportunities are created equally – and some will provide more defensive rigor than others.

The logic of logistics

The industrial sector is consistently touted as the rock star asset class of our time – with vacancy rates at historic lows of below 1% in some of our major centres.

But “industrial” is a broad term, covering everything from landfills to data centers, so it’s important to understand how each type of industrial property is exposed to current and future influences.

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The global pandemic has exposed fundamental flaws in the just-in-time supply chain model we have relied on until now to get goods delivered to our little corner of the world.

Prior to Covid-19, confidence in the speed and efficiency with which global shipping could meet consumer demand saw retail and distribution businesses here hold only a minimal amount of stock.

The disruption of traditional supply chains, including shipping, has spilled over into the industrial property market.

Chris McKeen / Stuff

The disruption of traditional supply chains, including shipping, has spilled over into the industrial property market.

However, “just in time” has been replaced by “just in case”, which has seen a surge in demand for warehousing and a greater reliance on our national logistics capacity.

Likewise, geopolitical and environmental imperatives have compounded pandemic pressures to encourage countries to think about greater self-sufficiency.

Because of our size and location, we are a trading nation, but that doesn’t stop us from looking to better meet our own needs to protect ourselves from global disruption and reduce our carbon footprint.

This will create a sustained demand for quality manufacturing facilities with automated factories and machinery.

The point here, from an investment perspective, is that the pandemic and its immediate aftermath has accelerated the speed of change. And if there will be winners, there will also be losers.

Even in sectors that stand out, there will be industries in decline that will be on borrowed time. Investors need to make sure they get exposure to sectors that are on the right side of change; that will not only provide a defensive hedge against inflation, but will have enduring qualities and the flexibility to adapt to changing times to support long-term performance.

The flight from the office to quality

If the industrial and logistics sector remains the star, it is not the only fair in town.

Post-lockdown office vacancy rates in our major centers reflect what the market calls a “flight to quality” as businesses seek spaces that not only accommodate the new hybrid work dynamic, but bring also a positive contribution to the well-being of personnel and the environment.

Changing dynamics are at play in the office sector.


Changing dynamics are at play in the office sector.

Functionally, this means flexible layouts with collaborative spaces, end-of-trip facilities that support active travel choices, EV chargers and energy, and waste minimization facilities. waste.

The flight to quality also has a geographic component, as in a competitive labor market workers increasingly choose companies based in areas with a range of leisure and entertainment choices and well served by public transport.

As in the industrial sector, this has created winners as well as losers, and landlords of lower quality offices in traditional CBD locations who have seen surrounding bars and shops close or move away have increasingly difficulty in attracting and retaining good tenants.

Retail adapts to change

The ability for consumers to pick up bargains from the comfort of their own sofa had seen the retail sector adapt to headwinds long before Covid.

But with the pandemic having cemented some of these growing trends, the sector is arguably the most pressured of them all right now.

Again, a generally dominant sentiment does not tell the whole story.

Easily accessible mixed-use centers anchored by big-box stores or supermarkets that attract heavy foot traffic continue to be in demand.

Changing attitudes are causing upheavals in all areas of the commercial real estate market.

Abigail Dougherty / Stuff

Changing attitudes are causing upheavals in all areas of the commercial real estate market.

We know the government is looking to boost residential development. Therefore, as communities grow or new suburbs spring up, these suburban centers should continue to attract customers, tenants and ultimately investors.

The commercial real estate market may still provide opportunities for investors looking to offset some of the impacts of inflation.

But remember, investing is not saving – and there is inherent risk associated with it.

Understanding the fundamental drivers of performance in each sector and sub-sector, and then applying that knowledge to create a diversified portfolio, is key to mitigating risk and protecting, and then growing, your wealth.

This article is not, and PMG Funds does not provide, financial or investment advice.