Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Real estate and infrastructure converging
“When it comes to both real estate and infrastructure there are a lot of things which are going to change,” says Kumar Kalyanakumar, the head of real assets in Australia for AXA Investment Managers.
According to Kumar, covid-19 is a “punctuation mark” in history and he believes events like this cause us to re-prioritise our needs as a society and redefine the way we do business.
“Real estate investments such as office and retail used to be known as ‘fortress assets’. Then we have seen what office [space] did. In a way, landlords/owners are today sharing the tenant’s business risk,” he says. “You become so connected to the tenants’ fortunes, you have to work with tenants and find that balance because there are only so many tenants to go around, especially in Australia.”
The firm has been reducing its new investments in the office sector for several years, pre-covid, and targetting higher growth areas such as logistics, health and life sciences and residential – from social and affordable through to the broader multi-family market as well as student housing.
Kumar was one of the founders of Eureka Funds Management, which became the real assets platform for AXA IM in Australia after its purchase in 2016. To date, in Australia, AXA IM has concentrated its real assets efforts on real estate, but the manager is hopeful of expanding into infrastructure locally soon.
“We have done a couple of health care investments which can be classified as social infrastructure,” Kumar says. “We’d need to gear up to do more of that.” Overseas, the firm has moved into areas like fibre optics, renewable energy and district power generation as part of its A$170 billion invested in real assets alternatives.
Real estate investing is becoming more complex. Most investments have characteristics of classic real estate, infrastructure and private equity. “The field we’re playing in is no longer an index style approach; no two assets are alike and therefore it’s more appraisal based… It’s more dynamic now. You’re looking at tax and different investment structures, and the form of capital – debt or equity. Investors are now also buying into operating companies as a part of real estate investments, like operators of student housing or data centres.” As an investor you need to have a much broader skills base nowadays or form strategic partnerships with those who have the skills.
Residential real estate is a big target area for AXA IM’s real assets’ alternatives growth in Australia as well as the US and Europe. The firm is the largest real estate manager in Europe and the fifth largest in the world.
Notwithstanding the immediate impact of covid on the education market, Kumar believes this sub-sector has enormous potential. The total stock of “organised” student housing, requiring experienced operators, is less than 10 per cent of the total of international students in Australia (880,000 in 2019, about 25 per cent of whom were from China and contribute roughly 50 per cent of the occupancies of student housing facilities). “When the borders re-open they’ll come back,” he says.
“AXA IM has been deploying funds for both AXA Group and capital partners to work in the alternate real assets space. This, together without extensive exposure and experience in the area of alternatives, help us to compete well with other global investors. Our current conviction lies In the alternate sectors. Investors are Increasingly seeking best risk adjusted returns and this Is where It can be found today.”
When it comes to alternative real estate, it appears that Australian super funds are a little slower to embrace the opportunity. However, global investors like Allianz, the Dutch pension fund APG, Singapore Government’s GIC, and OMERS, due to their exposure elsewhere, have been active players to date in Australia, along with AXA IM, he says.
A recent example in Australia of a logistics portfolio sold by private equity manager Blackstone attracted numerous foreign investors including AXA IM. The successful party was Hong Kong-based ESR, a logistics real estate investment platform, with capital funding from GIC.
