To take advantage of valuation dislocations in property markets globally, capital allocators have had to forge new partnerships, push into new asset class areas and – in the case of one of the country’s largest asset owners – explore direct stakes in companies and property platforms for the first time.
“We have been looking at taking more direct stakes in listed entities, which is something we have done in other parts of the organisation but we haven’t done in property,” Suzannah Morrison (pictured), Aware Super’s associate portfolio manager said.
Aware, the $140 billion super fund that increased its scale last year with the acquisition of VicSuper, has specifically been looking for direct deals to take advantage of dislocations in valuations between listed and unlisted real estate markets, Morrison explained during the opening session at Investment Magazine’s Real Estate Investment Conference in late February.
“Potentially it could be just to take a strategic stake or it could be take privates and the like as well. It’s something that is on our radar, it’s something are looking to build up capability in the next 12 to 24 months.
“It’s part of our broader strategy going direct, taking inhouse, buying in to operating platforms where we can and leverage our scale and build things out over time,” Morrison said.
Aware’s first ever global direct property deal was finalised in September in partnership with Dutch pension giant APG for a controlling stake in a European serviced apartments operator.
There will be more deals like the serviced apartments investment on the cards for Aware globally and perhaps locally as well, Morrison alluded.
Aware’s property team will look to leverage the experience of the fund’s $600 million plus take private attempt of ASX listed infrastructure company OptiComm as the group continues to pursue its more direct investment strategy, Morrison said.
Doing deals to take advantage of dislocations in property valuations has pushed asset allocators into different areas as well as into new partnerships and arrangements at a time when deal making has changed, the panel, which included VFMC head of property Peter King and IOOF’s head of property, Simon Gross, reflected.
“[New commitments] would have meant jumping on a plane and multiple opportunities to get to know the management and ops team and also some physical inspections and that all had to be done virtually. There were elements we took out of that [pre-COVID process] to frame a new approach,” VFMC’s King said, he added that commitments for VFMC would mean allocations to managers not direct allocations taken by asset owners such as Aware.
“Russel Clark our CIO said the lack of ability to travel overseas shouldn’t be a reason not to pursue thing,” King said. He explained an augmented due diligence process included other ways to get familiar with new partners including conversations with peer investors locally and virtual inspections utilising technology.
Opportunities remove boundaries
King spoke to the opportunity a dislocation in valuations between listed and physical real estate markets has presented.
“That’s a fairly active strategy we have created which we are monitoring but it’s so far so good and that’s probably opened our eyes to using REITs in a different way,” King commented.
Mid last year VFMC created an absolute return allocation to REITs away from the fund’s broader equities allocation to take advantage of the dislocation between physical and listed markets.
King said that while VFMC might not be big enough to take meaningful stakes in REITs his team would continue to look for opportunities to be involved in take-private opportunities in the current environment.
“With these dislocations in the last 12 months it’s a good opportunity for active managers to outperform so we are looking to expand our footprint in the REITs space, not just in terms of the amount of our allocation but in terms of broadening the set of REIT managers we work with as well,” IOOF’s Gross said.
Forging new relationships with managers and investment partners in different areas means testing new approaches to due diligence in the current environment, Gross explained.
“Compliance has always been important and its more important now than ever before particularly as we are entering into new asset classes,” Gross said, highlighting childcare as a new asset class his team is investigating. Gross also flagged further allocations to single-family residential overseas.
“We really do need to have very deep dives into these new asset classes and the capabilities, compliance of the external managers we use. Whereas we might have spent 20 per cent of our research time investigating those compliance and DD capabilities, now it will be 30-40 per cent, that’s a reflection of how important it is for us to do the work to understand the managers,” he said.
Reason to pause
While allocations and deal negotiations have continued throughout the last year amid the global pandemic, Aware’s Morrison reflected on impact COVID-related uncertainty had on deal discussions in the first half of 2020.
“I think everyone took a bit of a collective gasp and thought… is this the right time to be doing a big transaction?
“One deal I was working on we did pause for a little while and we did revaluate whether we wanted to be spending quite so much money at this point in the market where we just don’t know because there is so much uncertainty.
“I think a lot of investors took that pause and probably focused on portfolio management which is what we really focused on… We are not through the storm yet but there are green shoots and I think if you watch and wait too much you miss out on some good opportunities which is the approach we are taking now,” Morrison said.