Investment Insight | Office property
- A contrarian investment opportunity?
The September 2001 attack on the World Trade Centre in the United States dramatically changed the travel landscape. Not only were people scared to travel, but they were also deterred by the stricter security requirements and long queues at airports.
International travel
At that time, it seemed that the travel industry had experienced massive structural change. It was difficult to envisage the general public wanting to travel by air with the same frequency and nonchalance. However, as we now know, people’s appetite for international air travel only took a couple of years to return to the prior levels and subsequently went from strength to strength.
Airlines are a sector that has been significantly impacted by the COVID-19 pandemic. However, despite the challenges faced by the industry this time around, there is generally a degree of confidence that travellers will return once there is a vaccine. So, while the share prices of airlines remain very depressed, investors are eyeing them as likely beneficiaries if there is positive vaccine-related news.
Office properties
The same cannot be said for the owners of large office properties. This is also a sector that has seen material disruption, with people working from home for extended periods of time. As with airlines, the share prices of the pure play office properties have not bounced back from the lows observed in March. However, unlike airline shares, these companies are not on investors’ radars as beneficiaries if there is positive vaccine-related news.
The negative case for office properties
Both businesses and employees have made the transition to a more flexible work environment. In the medium term, this reduces the need for office space in the central city (fewer employees in the office at the same time). Over the longer term, there will be an oversupply of central city office space as companies transition to more suburban locations. As a result, few are optimistic towards the pure play large office owners in the United States, the United Kingdom, Australia and New Zealand.
The positive case
It may be hard for those who have been working from home for a long period of time to envisage a return to a full work week in the office. But we have short memories and it remains a distinct possibility that, like the 2001 experience with air travel, within a year or two central city locations will again be in hot demand.
It may be too early to buy the shares of office property owners, but there is clearly an opportunity for a contrarian investor because current valuations look attractive. The dividend yields expected from these companies next year range from 5-8%. In a world of low to non-existent interest rates, this yield is attractive and that may compensate a contrarian investor for being patient.
NZ Funds is positioning clients’ portfolios for a post-vaccine recovery. However, not all sectors will recover to pre-COVID levels. As an active manager, we are working to implement investments into sectors we believe will have the best chance of recovery.
International travel
At that time, it seemed that the travel industry had experienced massive structural change. It was difficult to envisage the general public wanting to travel by air with the same frequency and nonchalance. However, as we now know, people’s appetite for international air travel only took a couple of years to return to the prior levels and subsequently went from strength to strength.
Airlines are a sector that has been significantly impacted by the COVID-19 pandemic. However, despite the challenges faced by the industry this time around, there is generally a degree of confidence that travellers will return once there is a vaccine. So, while the share prices of airlines remain very depressed, investors are eyeing them as likely beneficiaries if there is positive vaccine-related news.
Office properties
The same cannot be said for the owners of large office properties. This is also a sector that has seen material disruption, with people working from home for extended periods of time. As with airlines, the share prices of the pure play office properties have not bounced back from the lows observed in March. However, unlike airline shares, these companies are not on investors’ radars as beneficiaries if there is positive vaccine-related news.
The negative case for office properties
Both businesses and employees have made the transition to a more flexible work environment. In the medium term, this reduces the need for office space in the central city (fewer employees in the office at the same time). Over the longer term, there will be an oversupply of central city office space as companies transition to more suburban locations. As a result, few are optimistic towards the pure play large office owners in the United States, the United Kingdom, Australia and New Zealand.
The positive case
It may be hard for those who have been working from home for a long period of time to envisage a return to a full work week in the office. But we have short memories and it remains a distinct possibility that, like the 2001 experience with air travel, within a year or two central city locations will again be in hot demand.
It may be too early to buy the shares of office property owners, but there is clearly an opportunity for a contrarian investor because current valuations look attractive. The dividend yields expected from these companies next year range from 5-8%. In a world of low to non-existent interest rates, this yield is attractive and that may compensate a contrarian investor for being patient.
NZ Funds is positioning clients’ portfolios for a post-vaccine recovery. However, not all sectors will recover to pre-COVID levels. As an active manager, we are working to implement investments into sectors we believe will have the best chance of recovery.
Source: Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Mark Brooks is Head of Income for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. Mark's comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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