OPINION: IT should not surprise anyone that crises accelerate investment trends. The initial effects of COVID-19 have been characterised by reactive, sometimes dramatic, changes. As this urgency subsides into the global pandemic’s next phase, where capital flows will become more calculated, we need to look to historic events to underscore some of the ways in which trends are expected to turn.
In our industry, change is inevitable and expected but the addition of a crisis magnifies both the velocity and magnitude of transformation. An interesting example of this shift is the accelerated uptake of ecommerce in 2020. While ecommerce is not new, the pandemic and the subsequent lockdowns has encouraged an uptick in online shopping. According to an Australia Post report, of the 9 million households that bought online in 2020, 1.36 million made an online purchase for the first time[1].
The winners in that space are logistics and last-mile logistics – getting from a warehouse to someone’s home – because we were not physically going to the shops. Over the past 10 years, we have observed investors re-allocate money from retail investments into logistics due to this dramatic growth, and this investment trend has accelerated dramatically in the past two years following the onset of COVID-19, and has transformed this sector.
The adoption of video conferencing has seen a similar acceleration. Video call technology has been available for many years but due to border closures and travel suspensions, the speed at which this has become a regular meeting tool is beyond organic.
Previously, when raising capital, it was expected that the pitch take place in person. Today it’s far more common for presentations to take place over a video call. It’s more efficient and cost effective for the pitch team, but it will affect the travel sector, from airports and airlines to accommodation and hospitality. In line with this trend, I’ve witnessed huge amounts of capital going towards data centres, while investment in the hotel sector has subsided.
The GFC was also a catalyst
This is not the first time a crisis has dictated a trend. During the Global Financial Crisis (GFC) of 2007-08 we witnessed a lot of correctional behaviour in the finance sector, particularly around market regulation and curbing highly speculative investments. Out of that came the Financial Services Royal Commission, which tightened a lot of financial activity.
Pre-GFC, investors were willing to participate in a broader spectrum of financial products as there was a higher tolerance for more exotic, high-risk assets. Once the crisis hit the sector, however, there was a large shift towards less risky, simpler investments, which continued for a decade or so.
What we’ve seen due to the pandemic is that same behaviour where there is a flight to perceived quality. People have become more focused on the most basic premium assets because there is a belief that during difficult times those assets will maintain their value and are less likely to suffer from shock. The risk of playing it safe, however, is that investors pay too much because they place a high premium on low risk.
Finding niche value
The thing about investment is that trends tend to exaggerate value. The challenge for investors in uncertain times is the ability to balance risk and return. Once a large number of people congregate around a small number of investment opportunities, we end up with some things being overvalued and other things being undervalued. The market then self-corrects: when things get too expensive in one area, naturally people look to buy something else.
What’s happening now is that some people instinctually turned to what they saw as ‘tried and true’ assets like office buildings and retail shopping centres because they are proven real estate sectors with long track records and plenty of market data. However, an interesting side effect of that is the correctional trend where others are investing in more niche sectors that have traditionally been overlooked, sectors such as aged care or data centres.
So, while investment in office assets continue to be popular, there will come a time when investors understand that these have become overvalued. The key for investors is to look beyond the trend and find niche and diverse opportunities that have strong prospects of future growth. This was a major consideration when we developed our Special Situations Fund, which covers last mile logistics, childcare, seniors living, self-storage, data centres, medium density residential and healthcare.
It’s difficult to forecast how much COVID-19 has impacted certain sectors while we are still feeling the effects of the pandemic, but if history has taught us anything, the trend towards safe bets will often not remain the best value investments. Once the appetite for popular, low-risk assets subsides, niche industries that look to the future will come to the fore.
By Nick Browne, director at Jameson Capital.
Nick Browne is a director and co-founder at Jameson Capital, an Australian-based alternative assets management firm. A real estate private equity and funds management specialist with Jameson since 2015, he previously worked in senior roles at Macquarie Funds Group based in Hong Kong.
