Hostplus is gearing up to venture offshore, diversifying into new asset classes, especially multi-family housing and logistics. Its initial target offshore is the deep and developed market of the United States.
“The US market offers good exposure to what they call the four main food groups: office, industrial, retail and multi-family,” says Spiros Deftereos, Head of Property with Hostplus.
“We can also achieve attractive geographical diversification in the US. There are many opportunities within both the broader US market and the different sub-markets, each with their own drivers and profiles, some still in their infancy.”
Deftereos says Hostplus will look to build exposure mainly within core real estate, but it is also looking across alternative sectors and up the risk curve. “We will do that in a measured way, no urgency or immediacy,” he says in an interview [i3] Insights.
Deftereos joined Hostplus in 2012 from Lendlease, where his role covered product development. He had also previously worked with Macquarie Bank as an analyst.
He says that for Hostplus the reality was that pressure to invest offshore had been rising because of rapid increases in contributions – to the tune of $700 – 800 million a month.
We try to establish relationships with a small set of managers who can provide us with a multitude of opportunities
Post-GFC, Hostplus had become somewhat inward-looking, he says. “We can’t sit on a large pile of cash, earning low returns. We need to put the money to work with an appropriate level of discipline. We need to be pragmatic.”
Deftereos said that the fund’s US strategy provided ‘another lever to pull, in addition to the domestic market’.
Hostplus decided on the strategy two years ago, when core assets in Australia were hard to come by as competition from foreign investors heightened and asset prices continued to set new records.
So far, the Melbourne-based fund, which looks after the savings of 1.2 million workers, mostly in the hospitality and sporting industries, has given mandates totaling $400 million to two large US managers.
“We are at a scale now where we can deploy capital into new strategies at around that level of commitment,” he says.
Deftereos has singled out multi-family and logistics as sectors with strong tailwinds driving future growth.
They are the new thematics in real estate, riding on the mega-trends set by millennials and the way how and where they want to live, work and shop, he says. And as consumers, millennials are fast outnumbering baby boomers.
In the US, they are starting to influence the shift to professionally-managed rental accommodation in preference to home ownership, while the emergence of e-commerce is causing structural changes and transforming retailing.
Deftereos says the logistics sector is benefiting from the growth of e-commerce and a greater need for reliance on strategically-located facilities.
Hostplus already has a minuscule exposure to US multi-family through its mandate with the large US manager Invesco.
“We invest in its large diversified fund, which in turn invests in multi-family along with other key sectors in the US,” he says.
By comparison, 15 per cent of the Hostplus’ real estate portfolio is currently allocated to logistics/industrial mostly in Australia.
“We have the capacity to increase exposure to that sector, but only in a prudent manner,” he says.
Hostplus’ other US exposure is through Kayne Anderson, a specialist in alternative sectors like medical office, senior and student housing.
Hostplus has invested $200 million with Kayne Anderson in its multi-sector core fund.
Deftereos says Hostplus is currently in active discussion with a handful of US managers to broaden its US exposure.
“We try to establish relationships with a small set of managers who can provide us with a multitude of opportunities,” he says. “That is what we have done successfully in the Australian market.
“We generally like to invest with high-quality managers with whom we can build long term trusted partnerships and grow with in a meaningful way.”
In Australia, Hostplus entrusts its capital to Charter Hall Group, Lendlease, and ISPT, an industry fund-owned asset manager. Hostplus is a longstanding shareholder of ISPT.
Deftereos says the number of managers may be small, but they have been able to present Hostplus with ample opportunities to invest and to grow with them as they expand their platforms.
Hostplus itself has grown from managing around $6 billion in 2006 to $46 billion today.
“For a growing fund like ours, we are looking beyond the first deployment,” he says. “An overarching requirement is that our managers must be able to provide us with a suitable pipeline and new strategies.”
An overarching requirement is that our managers must be able to provide us with a suitable pipeline and new strategies
Back in 2014, one such new, and in this instance, niche strategy that came Hostplus’ way was an opportunity to invest with Charter Hall in pubs with long weight average lease expiries.
Hostplus backed Charter Hall in the purchase of 54 pubs from Woolworths for $603 million, leased to the ALH Group on 20-year triple net leases.
Two years later, Charter Hall set up a second fund to acquire three pubs for $135 million.
“The second fund was established to allow us to take greater equity exposure,” he says. “In the first vehicle we have a 50 per cent interest, in the second, 90 per cent. The combined portfolio is worth around $1 billion today.
“For us, that was a great investment, diversifying away from the traditional sector into something we felt had strong core attributes. It was attractively-priced at the time, compared to the returns or the yields we could generate in the traditional sector.
“This is an example of how we are prepared to think outside the square,” he says.
Like many of its super fund peers, Hostplus has historically had a domestic bias, Deftereos says.
“At the moment, we have approximately 85 per cent of our property investment in Australia. For the most part we have significant exposure to office and retail.”
The largest allocation is to office, which accounts for 38 per cent of the total portfolio, which was valued at $5.5 billion, on an equity basis, at June 30, 2019, giving the fund look-through exposure to gross property assets of approximately $6 – $7 billion.
Through its managers, Hostplus is an owner of some of the country’s best blue-chip office towers.
Retail ranks second in scale within the Hostplus property portfolio.
“The reality is that the entire retail sector is facing headwinds at the moment due to negative sentiment,” he says. “We are starting to see that impact on the pricing of retail assets.”
But while it is not flavour of the month, Hostplus still has conviction in certain retail assets. “Longer-term, we believe there are segments of the retail market that will come through in a resilient fashion,” he says.
Deftereos believes that, given their regional locations, some ‘significantly-challenged’ shopping centres could give way to residential development, or some form of mixed use, such as healthcare and commercial.
Hostplus has interests in 82 retail assets around Australia, with some exceptional long term performers among them. These are dominant in their catchment areas, exhibiting positive attributes from the two ends of the retail spectrum: high-performing super regionals and resilient neighbourhood centres.
“We see challenges with some of the regional malls, and, indeed, some neighbourhood malls as well,” Deftereos says, while adding that retail increasingly defies broad categorization and needs to be evaluated asset-by-asset.
“Ultimately, each is subject to market conditions and demand drivers within its location; some shopping centres sit on sizeable land holdings in strategic locations,” he says.
“There will be challenges in the short term in the sector, but, overall, we think there are segments that still warrant investment in the long term.”
“In saying that, we do see a lot of benefits in diversifying our portfolio, not just geographically but across sectors, and essentially reducing our reliance and exposure to retail.”