The return environment in commercial real estate has become more challenged, with pockets of outperformance matched by underperformance, not only across the sectors but, more frequently, within the same sector.
Against this backdrop, passive portfolio management pegged to a benchmark has begun to look outdated.
By shifting our focus to one of active management with the freedom of a benchmark-unaware approach we now have more levers to pull in terms of portfolio construction and risk management.
This means we can take a more holistic approach to the construction and management of the portfolio, better capitalising on opportunities in the real estate market and managing the downside risks.
A great illustration of how we can better manage risk for our investors is how our active approach has allowed us to de-weight the portfolio’s exposure to the retail sector.
Over the course of the last 18-24 months our research had helped us identify that investments in the retail sector would be challenged from a returns perspective for the next few years due to the continued rise of online shopping and cyclical headwinds such as low wages growth and a more moderate housing market.
However, the Australian Real Estate Investment Trust (AREIT) index – in which we were previously invested – has a ‘look-through’ exposure to the retail sector of about 50 per cent.
By adopting an approach that means we are no longer constrained by this passively-managed AREIT exposure, we have instead been able to build a bespoke portfolio of retail assets, being selective about the type of assets that we are comfortable holding.
These include assets such as dominant regional shopping centres, as well as neighbourhood and convenience-based centres, which have a point of difference that means customers will continue to shop there, resulting in the asset continuing to be able to attract tenants throughout the market cycle.
Backing the winners
Conversely, active management has also allowed us to double down in areas that we see providing runways to growth.
Industrial real estate, and, in particular, logistics-related assets, has been a real outperformer as it is positioned as a beneficiary of the growth in e-commerce, and as a result of our active management approach we have been able to increase our exposure to this sector.
Similarly, in the office market, we are currently focused on the Sydney and Melbourne CBDs where there has been a significant withdrawal of stock over the last few years. As a result, there’s been limited new supply in the market and that has resulted in record low vacancy rates in both of those markets.
Another structural trend that we are looking to take advantage of is the global aging population. This translates into growth in healthcare real estate facilities and low-cost retirement housing assets, such as manufactured housing. We have been able to increase our weighting to these exposures, resulting in a well-diversified portfolio.
By having the flexibility to target growth sectors while being selective in our exposure to under performers, we feel confident we can deliver better diversification and risk-adjusted returns for our investors.
Author: Claire Talbot, Fund Manager – Real Estate Sydney, Australia
Source: AMP Capital 11 Sept 2019
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