Has global property become more interesting than investors recognise?

For much of the last decade, global property has struggled to compete for investor attention.

Investors have had plenty of reasons to focus elsewhere. Global equities, particularly technology shares, delivered exceptional returns. Property investors, meanwhile, had to contend with rising interest rates, concerns about office demand and an asset class that often appeared stuck in the shadows of equity markets.

The result is that many investors continue to view global property through the lens of its recent relative returns.

Yet that may be causing them to miss a more important development: the fundamentals underpinning many real estate sectors are stronger today than they have been for years. Robert Promisel, co-portfolio manager on the Nedgroup Investments Global Property Fund (“the fund”) on his recent visit to South Africa, described the opportunity set as one of the most attractive they have seen for decades, noting that one investment team member had been positing a potential "golden age" for the asset class. This optimism is driven by improving fundamentals rather than changing market sentiment or expectations of lower interest rates, leading to a prolonged underpinning to return prospects.

A different source of return

Unlike bonds, which largely rely on the income generated from their coupons, and unlike equities, where future returns are heavily dependent on earnings growth, listed property sits somewhere in between.

Property companies generate recurring rental income today, but they can also grow those cash flows through higher occupancy levels, rental increases and development opportunities.

The fund derives over 90% of earnings before interest, taxes, depreciation, and amortisation (EBITDA) from rental income. At the same time, the manager expects earnings growth across its opportunity set to remain robust, supported by improving operating fundamentals.

For investors seeking another source of return beyond traditional equities and bonds, that combination of income and growth is becoming an increasingly attractive diversifier.

The most important theme is supply

During the team's client interactions in South Africa, one theme that came up repeatedly was: supply.

Across much of the listed property universe, new developments are becoming harder to justify. Construction costs have increased by 20–40% over recent years, while property values have not risen at the same pace. In many cases, it is now cheaper to buy an existing property than to construct a new one. The replacement cost of existing stock is above the level justified by the near-term rental income that can be achieved.

This has translated into lower levels of new supply. Global property development is running below long-term averages across the majority of property sectors, and forecasts suggest supply will remain subdued.

Why does that matter?

When demand continues to grow while new supply slows, landlords regain pricing power. Higher occupancy levels and stronger rental growth ultimately flow through to earnings growth.

That dynamic underpins much of the manager's current optimism, and is expected to persist until rental income has been brought into balance with construction costs.

Some of the strongest demand drivers are structural

The portfolio's largest positions are not built around economic forecasts. Instead, they are linked to long-term trends that are already in motion.

Healthcare is currently the fund's largest sector allocation.

The investment case is straightforward. The population aged over 80 is growing rapidly, by approximately 4–5% in developed markets, increasing demand for seniors housing and medical facilities at a time when new supply remains near record lows. Occupancies have recovered strongly and rental growth remains robust. Companies such as Welltower and Ventas are positioned to benefit from this trend.

Data centres represent another major opportunity, but the opportunity is not as simple as chasing AI headlines.

The preference is for co-location data centres, such as the properties held and managed by Equinix and Digital Realty. These are highly connected facilities located close to major cities, internet exchanges and cable landing stations. Multiple customers operate from the same facilities, investing significant amounts of their own capital into equipment and infrastructure build-out. This creates high switching costs and makes the assets extremely difficult to replicate.

At the same time, demand continues to rise as cloud adoption expands and AI increases the amount of data that needs to be processed, stored and transferred. Combined with limited power availability and constrained new development, this creates an attractive environment for the owners of these assets.

Residential real estate is another example. Housing affordability remains a challenge across many developed markets, especially as rates remain elevated, while housing shortages persist. More people are renting for longer, providing a supportive backdrop for residential landlords.

Why this matters for diversified portfolios

Perhaps the biggest misconception is that global property should be competing directly with global equities. We see the asset class differently.

Global listed property companies provide exposure to real assets, recurring income streams and structural growth trends that are often difficult to access elsewhere. The listed property universe today includes healthcare facilities, seniors housing, data centres, logistics, rental housing and necessity retail assets. These sectors are supported by demographic, technological and economic trends that will remain relevant for many years.

Importantly, investors are able to access these opportunities while benefiting from the income characteristics that have traditionally been associated with direct real estate, at a discount to underlying property valuations.

The opportunity may not be about what property has done, but what it can do next

For years, the conversation around global listed real estate has centred on what held the asset class back. Today, the portfolio management team believes the conversation should be shifting towards what will drive future returns, irrespective of how the economic cycle develops.

In addition, many listed property companies continue to trade at valuations that the portfolio managers believe do not fully reflect the quality of their underlying assets or the earnings growth potential ahead.

That combination is why, after a decade of partnership, Resolution Capital is more constructive on global listed real estate than it has been since inception.