This article is from the Australian Property Journal archive
REAL estate saw its first quarterly outflow in the opening three months of 2023 since last year’s June quarter, as nervous investors followed the lead of the US Federal Reserve’s comments that interest rates would need to go higher for longer to contain inflation.
It is only the second quarter on global funds network Calastone’s record that investors have withdrawn capital from the sector.
The net outflow was a modest $30 million.
Most recent quarters have continued to see inflows but at a lower level than the average for the last few years.
Teresa Walker, managing director of Australia and New Zealand at Calastone, said commercial real estate is “triply vulnerable” when interest rates are high or rising.
“First, higher rates impact demand – lower occupancy affects rents paid to investors. And secondly, the sector uses more leverage than most so higher interest costs bite into profit margins. Finally, property values are also very sensitive to the higher cost of capital. Australia’s strong growth over recent years has supported the domestic real estate sector, but it is not immune to these realities.
“The start of the global rate-rise cycle over a year ago quickly caused a sharp drop in net inflows to real estate funds, driven mainly by a buyers’ strike rather than a big increase in sell orders.”
Calastone’s latest Fund Flow Index showed Australian investors pulled more capital out of managed equity funds in the first quarter of 2023 than at any time since the beginning of the pandemic.
Australian equity managed funds fared well to attract $320 million from January to March, albeit at subdued levels compared to historical quarters but a marked improvement from Q4 2022 outflows.
Outflows reached a net $516 million between January and March, making it the first quarter to see capital leave equity funds in three years. It followed a cautious December quarter in which inflows were a minimal $296 million, and while January saw strong buying activity amid rising stock prices here and abroad, February more than reversed those inflows as global markets deflated. The US Federal Reserve then flagged a higher interest rate environment on 6th March, and selling remained order of the day.
Neither the collapse of Silicon Valley Bank or Credit Suisse prompted a marked uptick in local selling.
“The ASX has been trading within a range over the last three months, rising and sliding in lockstep with global markets. It is too early to call a definitive end to the global bear market – rallies in the first quarter mainly reflected a cycle of flurries of optimism that financial conditions were easing, followed by fears they were not,” Walker said.
“The bigger picture is that, globally, corporate earnings are under pressure and inflation is proving uncomfortably sticky both here in Australia and elsewhere. The Reserve Bank held interest rates steady this month, going into ‘wait and see’ mode and long bond yields are falling indicating fears of a slowdown ahead.”
There was a clear preference for domestic equities in the first quarter. Australian investors added $319 million to equity funds investing in shares listed on the ASX, while they withdrew capital from every overseas category of equity fund, with the large global sector seeing its first quarterly outflows since the second quarter of 2020 – a net $617 million.
They were also negative on specialist sector funds – mainly those focused on infrastructure – for the first time since the second quarter of 2022, withdrawing a net $55 million.
Over the last four years, domestically focused funds have absorbed more than a third of the $28 billion Australians have added to their managed equity holdings, with almost all the rest flowing into funds investing overseas. This is despite Australian equities accounting for only 2% of global market cap and having a distinct sector bias, Walker said.
Meanwhile in the US, Blackstone recently limited withdrawals again in March for its flagship US$70 billion real estate income trust following a flurry redemption requests.
Of the $4.5 billion redemption requests made by investors in March, it allowed only US$666 million or 15% of the total requests. The March figure is an increase of 15% from the US$3.9 billion requested in February, however it is 16% lower than the US$5.3 billion in January.
BREIT has seen its market cap shrink significantly since the fund began limiting withdrawals in November last year, falling from US$125 billion to US$70 billion.
