After the merger with ANZ Wealth and MLC, the property portfolio of IOOF has grown to almost half a billion in FUMA. Florence Chong speaks to Head of Property Simon Gross about the next steps for the portfolio and the impact of the global pandemic.
When IOOF’s property team recently acquired a large-format retail centre in Minchinbury, in Sydney’s West, the transaction signalled a new direction.
Sourced off-market for $68 million, the purchase of the Great Western Centre foreshadows more such property acquisitions for the fund manager, whose funds under management administration and advice (FUMA) doubled to $494 billion when it completed its takeover of MLC in May.
Measured against its enlarged FUMA, IOOF’s current, actively-managed unlisted and listed property portfolio of more than $1 billion appears as a drop in its ocean of capital.
But this is poised to change as IOOF moves to increase and diversify property allocations. In the large format retail sector, as an example, allocation is set to rise over time from virtually zero now to 15 per cent or 20 per cent as counter-cyclical opportunities present themselves.
“We have started to invest our recently increased FUMA by growing our allocations to direct property,” says Simon Gross, IOOF’s veteran Head of Property, pointing to IOOF’s takeover of ANZ’s wealth management business some 18 months ago.
We are confident that funds under management will continue to increase. However, we don't want to put ourselves in a position where we have to invest a large amount of money in the short term.
IOOF, together with MLC’s investment team, is working to ensure that property allocations provide investors with maximum risk-adjusted returns and the benefits that the substantially increased scale will generate.
Gross says IOOF’s overall pool of property investment opportunities has doubled in recent months.
He told [i3] Insights: “We are confident that funds under management will continue to increase. However, we don’t want to put ourselves in a position where we have to invest a large amount of money in the short term.
“We need to be very selective with our investments and remember that property is a long-term asset class.”
With over 20 years’ experience of investing in property, IOOF has built processes, compliance procedures and expertise to actively manage its portfolio. For Gross, the operative words are ‘active management’.
His philosophy is to step up acquisitions, progressively and prudently, over a range of property asset classes and geographies to spread risks, and, most importantly, to generate strong and stable long-term returns.
Gross has been the architect and keeper of IOOF’s property investment policy since he ushered the mutual fund into actively-managed property nearly two decades ago.
Reflecting on IOOF’s early moves into unlisted property, he says the driver was a need to have an income producing vehicle that had (and still has) low correlation with other asset classes, including equities, cash, fixed interest, and most alternatives.
“We view property as a relatively stable asset class with a broad opportunity set. So, we started by setting up four actively managed buckets: listed A-REITs, listed global REITs, Australian direct property and international unlisted property.”
One of IOOF’s initial forays was into the listed sector, where institutional grade assets were held by well-recognised groups, including Stockland, Mirvac, Dexus, Charter Hall and Lendlease.
“It was a well-established asset class and well understood, and we were able to satisfy a slice of our initial property allocation by investing in A-REITs,” says Gross.
“Over time, we saw the need for diversification. The A-REIT market started to become relatively concentrated so we developed an appetite for global property securities.”
The advantage of going offshore was access to more than 500 of the world’s largest and best-resourced property groups. These populate the global REIT universe, and, by way of comparison, only 20 or so companies make up the Australian REIT indices.
The global market is now “very liquid, diversified, well-understood and transparent”, says Gross.
Today, IOOF holds a balance of listed and unlisted property in its portfolio.
The backbone of IOOF’s property exposure is its unlisted, internal Australian property trust, which holds its direct property assets. Since inception in 2002, it has been a strong performer, with the trust’s annual return in excess of 10 per cent over the last 10 years.
The assets are managed internally. Gross believes in having total control over the assets – the freedom of when or why to buy or to dispose of an asset.
For this reason, IOOF is unlikely to form partnerships or to participate in club arrangements. He sees no reason for co-investment. “We have no shortage of capital or expertise.”
It is not a matter of luck, but rather good management that has given IOOF a portfolio holding that is relatively unscathed by the COVID pandemic. Gross is a strategic investor; he does not go where other investors go.
Hence, metropolitan (suburban) offices, industrial real estate and the newly-acquired large format retail asset currently make up the sum of the IOOF portfolio. Traditional shopping centres are conspicuously absent, as are shiny CBD office towers.
At the moment, large, enclosed shopping centres are facing a challenging time. Conversely, large-format retail centres are performing well - more than 20 per cent of every retail dollar spent in Australia is spent in large format retail centres
Gross says: “At the moment, large, enclosed shopping centres are facing a challenging time. Conversely, large-format retail centres are performing well – more than 20 per cent of every retail dollar spent in Australia is spent in large format retail centres.”
Gross likes the Great Western Centre, for its size. It has 28 tenants, including Petbarn, BCF, AutoBarn, Super Cheap Auto, AnyTime Fitness, Total Tools, quality food offerings and a childcare centre. There is a weighted average lease expiry of seven years.
“It will generate a strong recurring income stream of nearly 6 per cent per annum for our investors,” he says. “This level of rental return, when supported by capital growth over time, is very appealing.”
He sees ‘substantial opportunities’ emerging in the large format retail segment. “We plan to broaden our footprint, and to potentially lift our retail allocation from virtually zero to possibly 15 per cent or 20 per cent over time,” he says.
Gross explains why he is cautious in relation to traditional shopping centres.
“Retail has been volatile compared to our other asset classes,” he says. “Many benefits of investing in the retail space have been outweighed by uncertainties and the lack of a consistent rental income stream. Until recently they were also traded at tight yields compared to office and industrial space.”
Office Real Estate
Equally, Gross is not a fan of CBD office buildings. Instead, he has concentrated on office space in suburbs such as Hawthorn, in Melbourne’s East, and Parramatta in Sydney’s West “for the simple reason that these offices are relatively affordable and generate a good rental yield which is consistently higher than that of A grade CBD assets”.
“With rents that can be more than 40 per cent lower than in central business districts, they cater to a wider pool of tenants.” Gross says Parramatta rents are typically between $400 and $500 per square metre, compared to upwards of $800 in a CBD office.
“They house a huge range of successful and sustainable medium-size businesses, such as engineering groups, employment agencies and accounting firms. Most of the staff live near these offices and they enjoy not having to commute into a central business district environment.
“Without exception, our metropolitan offices have held up extremely well throughout the pandemic. Our tenants have maintained their accommodation, some have, indeed, expanded their footprint.
In this COVID environment, they do not need to use public transport, their office is close to home. and they work in small teams rather than in CBD premises with hundreds of other people
“In this COVID environment, they do not need to use public transport, their office is close to home. and they work in small teams rather than in CBD premises with hundreds of other people.”
Back in 2011, when industrial properties were still widely unloved, Gross saw good value available (yields at 8 per cent-9 per cent) and seized on an absence of competition to build up a portfolio over the next six years.
“Industrial and logistics continue to perform extraordinarily well in this market, due to constrained supply and strong demand from tenants and investors,” he says.
Since the pandemic, industrial yields have crashed, pushed by growing demand among institutional investors seeking to ride on the coat-tails of a boom in online shopping, which has been accelerated by lockdowns.
All IOOF assets are under constant review for obsolescence. IOOF has sold nine buildings, bought in the previous decade, to keep its portfolio fresh and in keeping with tenants’ requirements.
Two years ago, IOOF started in earnest to pursue global opportunities in direct property in different subsectors – including housing, storage, and data centres. These sectors, Gross says, are simply not yet available with scale in Australia in an ‘advance form’, suitable for institutional investment.
Overseas, in markets like the US, he says, such alternative assets have long been mainstream investments for institutional investors. Without an offshore presence, the best option for IOOF was to join the world’s best global investment fund managers to find access to opportunities.
IOOF now enjoys successful investment relationships with a number of global property investment managers, he says.
“In all property transactions,” Gross tells [i3] Insights, “our point of difference is our ability to seamlessly transact on a range of large and complicated property opportunities.
“We are able to identify, secure and close deals in a timely fashion, and we are a trusted investor and counterparty. We are proud of our reputation and the outcomes that we generate for our investors.”
[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.