As a bridge between custodians of capital and managers of assets, Jennifer Johnstone-Kaiser has to keep her finger firmly on the pulse of the global and domestic real estate markets.
Johnstone-Kaiser is a Principal Consultant with Australian asset consultant, Frontier Advisors.
Frontier, established in 1994, has four shareholders — AustralianSuper, Cbus, HESTA and First Super. It advises capital totalling $410 billion.
Today, apart from its four shareholders, 40 super funds, university endowment funds and other groups are clients.
Among them are the Victorian industry fund, ESSSuper; Sydney-based Australian Catholic Super and Retirement Fund; NGS Super; Queensland-based BUSSQ and AvSuper, the aviation industries super fund. Collectively, they allocate around $30 billion to real estate.
Johnstone-Kaiser leads the firm’s property research programme, identifying investment opportunities and changes in market trends likely to impact clients’ portfolios.
Frontier also provides shorter-term tactical views to clients for rebalancing portfolios or pursuing new strategies.
The asset consultant works with regional and specialist fund managers who can best provide access to specific asset classes — and deliver returns.
I think now is the time to tap into markets where there is growth driven by demographic tailwinds and prices are still attractive
For Johnstone-Kaiser and her team, the challenge is to be a step ahead of trends in the face of the increasing challenges of compressing returns from traditional core asset classes, in particular, the retail sector.
The focus, she says, is always on diversification to manage cyclical risk. That means considering niche sectors, such as residential and healthcare, that are more cycle-resilient and less sensitive to macro-economic shocks. These alternatives can be a good complement to traditional core real estate.
Last November, Johnstone-Kaiser and Frontier consultant Benjamin Woolley travelled to the ‘Sun Belt’ states of the United States to research non-traditional asset classes, such as housing and healthcare (including life sciences and medical offices). Many of these sectors are well-established in the US but only now emerging in Australia.
Sharing insights following the US tour, Frontier noted: “Traditional core sectors are more subject to economic vagaries, whereas niche or alternative sectors typically are cycle-resistant.
“These (alternative) sectors are needs-based and driven by a long, demographic tail-wind.”
“The demand is needs-driven: housing, healthcare, medical centres and life sciences. The two fastest growing cohorts globally are the baby boomers and millennials. We believe this will place high demand on senior housing, healthcare and workforce housing,”Johnstone-Kaiser told [i3] Insights.
She describes housing affordability as a fundamental consideration in attracting and maintaining employees.
US Sun Belt cities are benefiting from the relocation of large employers, universities, and tech companies to more affordable cities. Austin, Dallas and Nashville are among some of the most popular choices and demand for more affordable housing has risen in these cities, she says.
Johnstone-Kaiser explains that, for employers looking to access highly educated talent pools, pre-conditions for the workforce are housing, education and healthcare.
“These sectors have been mainstream for the last 15 years, but are not as mature as traditional sectors because of fragmented ownership. It takes time to aggregate portfolios,” she says.
Just a handful of managers specialise in the niche sectors, although some global core managers have started to assemble portfolios within core funds.
“Our preference is for clients to go with specialised managers that have deep roots in local markets and strong operating partners. That said, we would also consider a diversified niche strategy,” Johnstone-Kaiser says.
“Returns on these asset classes are still higher than core returns. One reason is that the markets are not quite as liquid, and that ownership is fragmented.
“There is also higher operator risk. You have to rely very heavily on local operating partners to manage the assets,” she says.
With a lot of capital chasing these assets, she expects maturation of the niche sector, with pricing to go up eventually.
“A window to invest in these sectors exists over the next few years, so I think now is the time to tap into markets where there is growth driven by demographic tailwinds and prices are still attractive.”
For real estate, we look at managers by geography, risk and specialisation spectrum. Today, we have a list of 25 to 30 potential managers, and around 15 are on our short list.
The success of Frontier’s client performance lies in the strength of the managers it identifies. Currently, Frontier is undertaking due diligence on several strategies in the niche real estate space.
“For real estate, we look at managers by geography, risk and specialisation spectrum. Today, we have a list of 25 to 30 potential managers, and around 15 are on our short list.”
In recent times, Frontier has also had to keep a close watch on managers for their ESG compliance, and in turn, the assets they invest in.
“We are undertaking a lot of work across all asset classes on ESG and the (United Nations) Sustainable Development Goals,” she says.
“We have to be, and are, across issues such as climate change and modern slavery. Our clients are focused on making sure their portfolios are best practice.
“Depending on an investor’s growth profile, risk tolerance and internal resources needed to monitor their investments, a global allocation could be between 20 – 40 per cent of property assets under management. The proportion is rising gradually.”
“So far our clients have been invested in core strategies offshore,” Johnstone-Kaiser says. “Offshore core total returns are roughly 7 – 8 per cent, but compressing. Managers’ forecasts are now 5 – 7 per cent.”
Johnstone-Kaiser says the additional capital flowing into Australia’s super funds will increasingly be funneled to offshore investments and sectors such as niche and logistics.
And the geographical preference will be the United States and Europe.
“With logistics, we are looking at Europe and the US, and investing very selectively,” she says. “Logistics is highly sought after, so we have to be selective and considered with the partners we bring forward to our clients,” she says.
“The managers we select need to have demonstrable track records and access to pipelines into the future. We don’t want managers who take unnecessary risk, developing speculatively for quick returns. This kind of profit is not sustainable.”
Frontier looks to its managers to have a ‘research-ethos’ to alert them to the macro-environment and its impact on supply and occupier demand.
“We also like them to be innovative,” says Johnstone-Kaiser, citing the example of a manager who runs an innovation lab.
“This manager works with customers in the US and Europe to see how they develop their technological systems and deal with automation and employee well-being generally.
“Their view of real estate is a combination of defensive and growth. Defensive to the extent that you have sustainable income growth over long-dated leases.
“The trap is that when people think ‘defensive’, they mistake that for liquidity. Defensive assets such as real estate or infrastructure are illiquid assets.
“Real estate’s risk profile sits between bonds and equities, with a growth component to it which is underpinned by a bedrock of core income (from secure, long-term leases).
“We have a strategic asset allocation framework for structuring portfolios over the long term. We superimpose a more tactical, dynamic, asset allocation framework on top of that.”
Frontier publishes quarterly views on how it sees any asset class within a global context.
On real estate, it looks at a number of indicators to assess whether they are more attractive than bonds, or whether global property securities are more expensive than Australian property securities.
“Our views are shared with our clients, advising them to rebalance or stay out of the market if we think it is unattractive,” says Johnston-Kaiser.
In this low-rate and low-growth environment, property has had an elongated cycle, she says.
It is difficult to predict whether it will just coast along or whether some exogenous event will slow it or end it. That is the $64.000 question.
“Could the coronavirus outbreak be that event? Already education, tourism and retail sectors are impacted. A slowdown in GDP growth could test the defensive income streams of core assets,” she adds.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.