By Marc Edelberg, Partner at Mazars Cape Town
After the economic uncertainties of the pandemic recession, Real Estate Investment Trusts (REITs) are bouncing back stronger, and their prospects look bright as they continue to pique the interest of investors with a new thematic focus.
The impact of the pandemic on REITs
REITs – like everyone and everything – were not immune to the Covid-19 pandemic. Some REITsthat evolved around the gathering of people (retail stores, hotels and office buildings) were challenged or even crushed by the lockdown. Yet, others (warehouses and data centres) unexpectedly flourished as the world adapted to a new reality.
This contrasting performance of different REITs can largely be contributed to two dominant events – the rise of e-tailing and remote working. As a result of these two trends, there is a bigger demand for structures, properties and facilities that can provide the backbone of services that have become part of our new normal during the pandemic.
Out with the fruit salad approach – the value of specialisation
These interrelated occurrences catalysed an interesting shift in the future trajectory of REITs both locally and globally. We’re seeing REIT companies take the lead in specialising and creating investment portfolios around specific building types as opposed to the more fruit-salad approach. While traditional investors preferred a diversified portfolio of multiple real estate sectors, recent real estate investment strategies have shifted to specialised portfolios. “Don’t put all your eggs in one basket” has been the golden-rule for ages, but we’re seeing that specialisation and the accumulation of niche knowledge and expertise can really offer tangible returns — music to the ears of any shareholder or investor.
To substantiate, specialised REITs have been validated as a superior real estate investment strategy compared with their diversified counterparts on both investment performance and interest rate risk management dimensions, according to a doctoral thesis published by the University of Sydney.
The main benefit of specialisation is that you can easily replicate a strategy that works. Once a specific building is bought or built for the first time, owners start to learn what infrastructure is needed. By acquiring a second property in the same industry, owners can leverage their former knowledge and build on what they already know. The same goes for the third, fourth and tenth property which creates a natural path for expansion in a particular space. By specialising, owners can understand the industry that they are working with and with that comes a natural synergy of benefits including understanding risks and opportunities better.
Another benefit of specialisation within the property market is that you can expand without wearing yourself too thin. Diversification can require a lot of hands-on management as you tap into different property types in different locations in different sectors. Each requires your attention and can be more complex than having a specialised strategy that you can use over and over again.
With that said, any advisor will remind investors to diversify their risk and as with anything, there is a risk in specialising. Take for an example the rise of hybrid working that has made many office spaces obsolete. If market forces change in a specific field of specialisation, owners will have to be agile and change with those trends or risk being blown out the water.
Specialisation – not just a consideration for REITs
This trend can be true for non-REIT investors too. While REITs may be leading the charge towards specialisation and taking the road less travelled in terms of this investment strategy, the twin forces of specialisation versus diversification is one for all investors to consider as markets slowly emerge again from the pandemic ashes.