However, Mr Berry said 2020 is very unlikely to match the returns of last year, with investors needing to recognise there are increasing risks emerging, particularly at such a late stage in the investment cycle.
“We’ll be continuing to take a fairly conservative approach to valuations pushing up capitalisation rates,” he said.
“Our preference will be to have exposure to high-quality assets, AREITs with less cyclical factors, and investments trading at discounts that are out of favour. The recent shift towards value, with some reduction in risk behaviour, has seen this approach start to outperform while continuing to deliver good absolute returns.”
While geopolitical issues weighed heavily on global markets last year, it was also an interesting year for the Australian property market and its various subsectors.
In late 2018, the US Federal Reserve pivoted from a more hawkish to dovish position which continued into 2019, while the Reserve Bank of Australia cut interest rates post the federal election and continued to be accommodative as the year progressed.
According to Mr Berry, this provided a favourable backdrop for property driven by an appetite for yield.
“For the past two years, we have been at an advanced stage in the property cycle, particularly for commercial office and industrial property sectors. Capitalisation rates (rental yields) are below levels experienced in prior peaks, with the lower bond yield environment extending pricing of property assets,” he said.
From a portfolio perspective, we adopt a more conservative through-the-cycle approach in our investment analysis. The reason we do this is to become cautious at advanced stages of the cycle, and opportunistic when prices are attractive.”
Across the broader investment spectrum, including equity markets, there has been a very significant divergence between growth and value companies, and the property sector sits within this broader context of late cycle, higher pricing and a more elevated risk appetite.
“2019 has been a relatively good year for the AREIT sector, with strong returns including distributions and, looking ahead, if bond yields stay around current levels, we would expect the sector to be well supported,” Mr Berry said.
