Global real estate as a store of value

-- | 18/02/2021

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Lex Hall: COVID has changed the way we think about many things, and one of those things is real estate. What sort of impact has the pandemic had on it and what will the future hold? Today, I thought I'd catch up with Chris Bedingfield from Quay Investors. He oversees Quay's Global Real Estate Fund.

Good day, Chris.

Chris Bedingfield: Good morning, Lex. Thanks for having me.

Hall: My pleasure. The first thing I wanted to ask you, Chris, was what sort of place should global real estate occupy in the portfolio of the average retail investor do you think?

Bedingfield: Yeah, I think sometimes it gets overlooked as an asset class that can diversify against, say, other global equity type exposure. So, nothing sort of has shown that more so than, I guess, over the last couple of years we've seen, on the equity side, global equity side, tech stocks do very well and then, real estate can sort of be the offset to that, can be quite a diversifier in terms of that. I think also the other trap that sometimes investors might feel as though—you know, I have my house, or I might have an investment unit here in Sydney or in Melbourne, so do I really need to double up on real estate? And I think when you think about global real estate, there are just so many different types of exposures you can get, which are highly not correlated with residential, such as self-storage or data storage or industrial property, and way beyond the traditional shopping centers and office buildings and those sectors are not correlated even within themselves. And so, it can add diversification and it can present investors with unique investment opportunities.

Hall: Okay. That's a really interesting point. I should say we'll talk about a few stocks that illustrate what you are saying about the diversification. Rough year in 2020 not only for you, a worse year for the index. What were some of the key challenges do you think?

Bedingfield: Yeah, again, this comes down to not all real estate is the same. Some sectors have done very well during COVID—real estate sectors have done very well during COVID. Some of the stocks that we own in our portfolio continue to hit all-time highs. We are unhedged. So, the Australian dollar, the rally in the Australian dollar has sort of crimped our returns a little bit. But at the other end of the spectrum, you've had sectors that have been very disproportionately affected. So, coastal apartments in the United States, shopping centers, office buildings, I mean, they're probably the main sectors that have been hit pretty hard. Real estate—and I think this points to an opportunity. Real estate has been a sector that has been asked to shoulder the burden more than pretty much any other sector in equities. So, maybe apart from banks. But the government has basically said, here comes the virus, we need to do something to help everyone out. By the way, real estate, you've got to help as well. And that's been reflected in the pricing and particularly those sectors I mentioned a moment ago.

As we move through the virus and hopefully, the vaccine does its job, those headwinds for those sectors are going to become very, very large tailwinds. And so, that's where the opportunity lies. I mean, it really is a stock picking process. Like I said, some sectors have done extremely well, and others have been, you know, through legislation as much as anything else, have been hit pretty hard.

Hall: Yeah. I should say the Quay Global Real Estate Fund has posted 10 per cent since its inception in 2014. Five years ago, Chris, you were saying the risk to investors is sustained low interest rates and look where we are today. They're talking about low interest rates up until 2024. To what extent can global real estate still be an income provider?

Bedingfield: Well, I think at the end of the day, global real estate does get categorized as an asset class to provide income. And I think it's a bit dangerous to think about it like that. We think about it in terms of total return. And if you think about some of your viewers or yourself, some of your best investments, probably one of the best investments you've ever made in your life is probably if you bought a house or an apartment 15 years ago or 20 years ago, if you're of that age. You would have outperformed pretty much every fund manager in the country and probably (indiscernible) well. And you didn't buy it because of yield. You bought that house, or you bought that apartment—maybe some people did—but really, it comes from that very slow accreting capital growth over time. So, in a low interest rate environment, the growth becomes even more important, I guess. And so, that's where our focus is and I would caution people to think about real estate for just yield, because that can sometimes lead to traps.

Hall: All right. Let's talk about that diversification that you mentioned. I noticed two of your biggest sector weightings at the moment are multifamily apartments and storage. What sort of expectations do you have in those two?

Bedingfield: Yeah. So, storage is broken up into two components and the larger component is European self-storage. It's a really simple business as I'm sure maybe a lot of people who are watching this would know. It's driven by the three Ds—death, divorce and dislocation. And what we've seen it really is economically agnostic. It does well despite the economy. Its biggest issue is generally supply or excess supply. But look, one of the best real estate stocks you could have owned 25 years ago was a storage company in the United States called Public Storage. Storage industry in the United States was in its infancy back then. Not a lot of product awareness. And here was a company that was an expert in its field. It consolidated the market, grew its position and as user acceptance sort of grew, it grew into that, and Public Storage has outperformed by multiples most of the major industries, and even some of the well-known tech stocks.

If you think about European storage, it's basically where U.S. storage was around 25 years ago. So, the amount of supply of storage in the United States is 9 foot per person. In Australia, depending on the numbers you're looking at about 3 foot per person and in Europe, it's 0.5 foot per person. There are some unique opportunities where you can almost get in a time machine and go back 25 years and remake your investments and that's where a lot of our storage exposure is. It's in Europe. It's a multi-decade secular story.

Hall: I just wanted to finish by asking you about shopping malls. Are they still sort of seen as a—correct me if I'm wrong—as a sure thing because I read the other day that H&M, a big fast fashion retailer, which is probably an anchor tenant in a shopping mall, is closing some shops? Does that tell us anything? Is that a risk or…?

Bedingfield: Yeah, it tells us—so, our thesis on retail is, you need to be very local community orientated needs-based retailing, so things like supermarkets or hairdressers, pharmacies and the like. We think that does really well. That's literally your last mile delivery that the industrial guys are trying to replicate. So, we think they do okay. And then, we think the other end of the spectrum, which is the most productive, big traffic, high sales per square meter shopping centers, they will do well as well. So, you either got to – you got to pitch yourself as being incredibly convenient or pitch yourself as being incredibly experiential, almost like the day out.

In between is probably where the risk really lies. The shopping center that isn't really convenient, it doesn't really offer that big experience, it's just a place to go and pick up stuff. We think that—we would call that largely sub-regional shopping centers in Australia. We look around the world, there are the shopping centers that are struggling the most. That's where ecommerce—if you want stuff, you just go online, and you get it. And have the experience, then you got to go to those better shopping centers. So, what you're hearing about retailers closing stores, that's our thesis. Our thesis is, the retail model going forward is no longer to have stores in every shopping centre across the country, which was the old model. The new model will be to have maybe 5, 10, 20 stores in the best locations with the best footfall, with the most number of eyeballs going past your brand, that's generating the high level of sales, because those stores are no longer about distribution. They are about distribution, brand, marketing, product positioning, customer service, customer interaction, which you can't—Amazon can't compete against that, and that's the way retail is going to go forward. So, the number of stores will be less, but the stores they'll have remaining will be more strategically important.

Hall: Okay. I forgot one crucial sector obviously and wanted to get your thoughts on that, offices. What's your take on that?

Bedingfield: We haven't owned office buildings in the Fund now for five years. We fundamentally believe you shouldn't own an office above the cost to build. But in the United States, right now, they've just been slaughtered, and the pricing looks really interesting to us right now. We think we can own office buildings in Manhattan, Midtown Manhattan for a half the cost to build. We don't believe the story that the big cities of the world are going to fall into the ocean. We've had 4,000 years of urbanisation. I don't think that's going to change anytime soon. Right now, there's the panic. Now is the time to start picking around the edges and finding those opportunities that in five years' time people are going to keep themselves that they missed out on.

This report appeared on 2021 Morningstar Australasia Pty Limited

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