(pictured: Chris McGibbon)
Institutional investors are boosting their allocations to property and other ‘real’ assets in the face of low and even negative yields, TH Real Estate told a media roundtable last Friday.
The roundtable featured country heads from TH Real Estate’s UK, US and Australian businesses, as well as its global head of debt, Jack Gay.
Chris McGibbon, global co-head of TH Real Estate (Americas), said: “Low interest rates have teed off a global search for yield, with risk-free interest rates below 2 per cent in the US, and that search for yield is leading to the alternatives sector. The trend we are seeing is that more and more institutions are comfortable not only with real estate, but also with infrastructure, agriculture, timber, and even metals, oil, energy, maritime – the full alternatives sector.”
In terms of allocations to alternatives, McGibbon said these were up “across the board”.
“Investors are allocating to alternatives to be defensive, contrarian and countercyclical. We are even seeing some funds go to 30-40% of their portfolio, especially some of the big sovereign wealth funds,” he said. There are some fundamentals driving this trend,” he said.
“A big consideration for investors is the liability structure. They have a very long-dated liability structure going into real assets. If we look at infrastructure, a lot of these [investor] groups are not going to be in payout phase for 10, 15 or even 20 years, so they can tolerate illiquidity – and they get a nice premium for it. So we are seeing continued movement in that direction.
“There are some large Asian funds that are for the very first time looking at real assets and we will see billions of dollars poured into the sector. It’s a search for yield but it’s also a diversifier, and it is somewhat defensive – bricks and mortar are just that. If you look at the West End of London there are buildings that have been there for 300 years, and if an investor has owned it for a long time they are still getting an income for it.”
Mike Sales, global co-head of TH Real Estate (Europe and APAC) said the post-Brexit activity in the UK market reflected enthusiasm for real estate among institutional investors. TH Real Estate was one of several retail funds that froze redemptions in the aftermath of the vote – although they will be opened again next week.
“When those funds closed and there was a perception there might be some distressed assets, the capital that flowed in to try and find those assets was from all over the world. Asian sovereign wealth funds, US opportunistic funds, domestic REITs, financial institutions, pension funds. The wall of money that was there was considerable,” he said.
Ultimately, a quick recovery meant very few buying opportunities in the distressed space, according to TH Real Estate. Sales said real estate is particularly in favour among European investors, in the face of ow returns and negative bond yields.
“Allocations in Europe are not as high as the US, for example – usually 5-15 per cent for real estate. But the key point is the relativity – what real estate is delivering from a yield perspective, when you compare it to other asset classes, it’s very attractive,” he said.
With around US$97 billion in assets under management, investors are attracted to TH Real Estate’s benefits of scale and its position as an operating division of TIAA Global Asset Management.
“Where we were at one time a real estate manager, being part of global real assets umbrella is creating a lot of synergies for investors. We are hearing from investors and consultants that they don’t have the resources to deal with 30 or 40 different [asset manager] relationships – but maybe half of that.
“They have relatively small teams, so they are looking for efficiency and quality, and for groups with whom they can do more than one strategy around the world. So we are seeing consolidation towards managers who can offer a true global menu of alternatives solutions.
“For example, investors who are doing agriculture with us in the US might want to do a retail strategy with us in Europe or a logistics strategy with us in Asia. So we are creating a platform where we can connect the dots across all those investors with one relationship, one asset manager, even one board presentation, to get them comfortable with us as a group. We are never going to be everything to everyone but having that global menu puts us in a select few,” McGibbon said. Also high on institutions’ list is local expertise.
“Investors are not looking for generalist allocators that sit in one market and allocate all over the world. They are looking for boots on the ground, which is why we now have 18 TH Real Estate offices across the world and will have 21 by end of the first quarter. We aren’t going to pick every market but where do pick markets we have a team that is living and working there,” McGibbon said.
In terms of how investors can extract value in the current market, investment discipline is key.
Sales said: “There are a lot of different clients out there with a lot of different costs of capital, and we still need to be very selective. We launched our European Cities Fund in the [Northern] summer this year, and we’ve already got our first asset acquired – in Bologna.
“This would not be everyone’s idea of a top European city but it ticks all those boxes that you’d want, in terms of an attractive city that people want to be in, affluent, young – so we’re really focused on the long term structural growth, and we think we’re going to get that in the big cities.
“We are looking through the cycle and saying this is a market that will continue to grow and grow and grow.”