Property investment boom – and it’s not just houses

Listed property exposed to major growth themes can be a boon for investors as it can serve as a source of real income and capital returns.

This is the view of Schroders South Africa’s head of intermediary, Philip Robotham, who said property investors can often benefit from rising inflation.

This is partly because rising building materials or labour costs hold back new construction, making existing properties more valuable. However, many types of property also have direct links to inflation.

“While higher interest rates may have weighed on valuations in the past couple of years, global investors should not forget that listed property exposed to major growth themes may provide an attractive combination of capital returns and real income,” he said.

Leases across all types of sub-sectors can have explicit commitments to rental increases tied to inflation. 

For example, some leases have fixed “escalators” or rent reviews at specific times. These allow investors to earn a real return that is above inflation.

However, Robotham warned that not all global real estate assets are identical. Investors need to pay close attention to the specific type of property they are investing in. 

For example, some types of real estate – like housing and hospitals – are essential. Others, such as student accommodation or data centres, benefit from strong demand and limited supply. 

“We can gauge the growth of data centres by looking at power consumption trends, and they are certainly encouraging, to take one example of a property sub-sector which looks to enjoy strong future growth prospects,” he said.

The chart below shows the US trend for data centres’ power consumption.

In contrast, some sectors are both inessential and are experiencing weaker demand.

Therefore, while the growth of eCommerce and working-from-home trends since COVID-19 has benefited certain industrial property segments like logistics, it has also weakened many retail and office sub-sectors. 

As a result, the “pricing power”, or ability of owners in these areas to pass on inflationary rent increases to tenants, has been severely impacted.

Urbanisation, however, has remained an enduring underlying structural trend. This trend has seen demand for living in cities at record highs, resulting in rents going up and, therefore, benefiting the apartment sector. 

Indeed, sticky so-called “shelter costs” are one of the reasons why inflation in the US economy has proved difficult to tame.

Robotham said investors can access these trends by investing in various property assets, from self-storage to manufactured homes, industrials, and other fast-growing digital economy assets like data centres.

Even prior to the mass adoption of AI – which relies on data centres to remotely host the required cloud computing processing and storage capacity – supply was struggling to keep pace with demand in major metropolitan areas.

The potential size of the data centre opportunity remains debatable, but according to a recent McKinsey & Company report, forecasters estimate that total demand could hit 35 GW by 2030 in the US, more than double the 17 GW recorded in 2022.

“Structural growth trends like these explain why listed property can provide a compelling option for global equity income and capital growth opportunities,” Robotham said.