The real estate world is sometimes both familiar and opaque for those looking in from the outside.
Familiar given the tangible and ubiquitous nature of it. Just about everyone has direct experience with various types of offices, retails, and dwellings – whether that’s apartments, single family homes, student housing, senior living, or lodging. GP surgeries and hospitals are equally familiar.
Less familiar, are non-consumer facing and/or niche property types. These may include industrial property, self-storage, and life science buildings. Data centres, cell towers, and specialist facilities will not be familiar, and few will have experienced them up close.
So, while the array of possible investment options is broad, the problem is each property subsector mentioned above has its own unique demand-and-supply factors and therefore rental growth prospects can vary considerably too. Aside from lease structure and covenant strength, growth prospects are the principal driver of value for any given property.
As we all know, property is far less liquid than equities, government bonds, and even corporate bonds. Each property is unique, and the problem of pinning down medium/long-term future growth with any precision is far from easy in stable times. And it is almost impossible when:
- There are structural changes underway for property usage/non-usage.
- There is a massive reversal in the cost of capital, or…
- The economy is on the precipice of a boom/ bust scenario.
Despite the difficulty in assessing future rental growth with any precision, it is still the single most important factor in assessing return prospects and value today.
