Australia’s largest global insurer, QBE, is increasing its exposure to European property and favouring unlisted core funds in its global property portfolio, treating them as a “bond diversifier” that will deliver a steady income stream, rather than as a growth asset.

QBE began its global real estate investment program about five years ago explains Gavin Mork, QBE’s manager, property and alternatives, but for reasons different from other institutional investors, such as superannuation funds.

“Our reason for using real estate in our investment book was more of a bond diversifier and bond replacement, given the low level of yields around the globe, and the attractiveness of the income stream that is achievable in property,” Mork explains. “[When it comes to] super funds, some of them do that but most of them are looking at it as a growth asset type of diversifier and taking away from equities to buy property.”

With growth expectations that aren’t as high as some other investors, QBE keeps these investments “fairly simple and vanilla”. The company doesn’t have to worry about currency hedging because it has a US dollar book, a euro book, a sterling book and an Australian dollar book, and liabilities in differing currencies are kept separate.

He says the company began in the US by getting access to unlisted funds, and its property strategy there is similar to the approach it takes inAustralia, Europe and the UK.

“Our size wasn’t going to be that high that it warranted a more bespoke…co-invested or direct approach,” Mork says. “And the benefits of that for us were, one, getting access to professional management in that space, especially in markets where we certainly didn’t have an expertise.

“And also, once you are invested, you have an immediately diversified exposure to direct real estate through the fund, and across all the sectors as well − office, retail, industrial and multi-family.

“We did it only in core funds, we didn’t look at core plus, we didn’t look at opportunistic or value added, we just went very vanilla. Our approach to it was more of an income-seeking asset than a growth asset.”

Looking ahead, Mork says he is concerned that real estate is “certainly not at the end of the cycle but later cycle”. Capitalisation rates in the US as a whole, and in some specific sectors and cities, are lower than they were before the financial crisis, he says, and property returns over the next 24 to 36 months will probably decline.

“Having said that, we have had that view for two years and it’s continued on, so I don’t have a lot of confidence about being right about that,” Mork says.

One approach in response to this outlook is reducing exposure in the US and shifting it to Europe, based on the view that Europe “has a bit of catching up to do in property, compared with the US.”

“It hasn’t had those double-digit returns and had the economic tailwinds the US has had; it’s starting to see that come through now, so we are a bit more positive there,” Mork says.

The company is also closely watching its UK exposure, due to uncertainty around Brexit.

“The UK funds we have contain very little London city exposure and certainly less London city office exposure, so we have kind of been protected from that,” Mork says.

Mork was speaking ahead of participating in the upcoming Investment Magazine 2018 Real Estate and Private Markets Conference, at Crown Towers, Melbourne, on February 27-28. He will join State Super senior manager, unlisted assets and alternatives, Megan Chan, and IOOF portfolio manager, property, Simon Gross, for a panel discussion titled ‘Determining exposure strategies’. The session will be facilitated by Atchison Consultants managing director Ken Atchison. For more information, see the event website or contact Emma Brodie +61 435 023 004, [email protected]

Ben Hurley is a journalist and editor with more than a decade of experience in the industry. He has written for The Australian Financial Review, Business Review Weekly, The Guardian and a range of specialised and industry publications.
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