Only ten years ago, the Hostplus property portfolio consisted almost entirely of office and retail. Today it is a much more diversified portfolio, Spiros Deftereos tells Florence Chong.
In the mid-2010s, before logistics and convenience shopping centres began to appear on the investment radars of institutional investors, Hostplus began investing in these unloved asset classes.
It was a prescient move.
Within a few short years, logistics and convenience shopping would become key investment thematics for the institutional investment community in both Australia and globally.
The perceptions of logistics – and small retail centres serving essential daily needs – were transformed in the wake of the COVID pandemic, when lockdowns shut down almost every part of the economy.
A combination of global supply chain challenges and a rapid migration to online retailing triggered unprecedented demand for warehouses and fulfilment distribution centres.
And while super-prime regional shopping centres closed their doors during lockdowns, small neighbourhood centres thrived on the back of their supermarket anchors.
Spiros Deftereos, Head of Property at Hostplus, recalls: “When I joined Hostplus (in 2012) office and retail accounted for around 95 per cent of our core property portfolio – more than double our weighting today.”
“At the time, the weight of office and retail served us well because these asset classes were delivering on their objectives. We had stable income returns and enjoyed strong capital growth.”
When I joined Hostplus (in 2012) office and retail accounted for around 95 per cent of our core property portfolio – more than double our weighting today. At the time, the weight of office and retail served us well because these asset classes were delivering on their objectives
Despite the relative security that retail and office provided, however, Deftereos and his team acknowledged a need to diversify away from these sectors – in part because of emerging secular trends, such as e-commerce, which was starting to impact on retail.
“If you look at our programme over the last six to seven years, we have looked offshore for fresh opportunities in alternative sectors – and we have allocated incrementally to logistics and convenience retail,” Deftereos says.
“Obviously, proportionately our investment in office and retail has been reduced.
“Retail has evolved. We had a big exposure to regional malls, which have a big discretionary spending component. We felt then that we would not increase our exposure, and one way to resolve that objective was not to deploy more capital to large shopping centres.”
Instead, Hostplus began spreading its investment to neighbourhood shopping centres. “We deployed a fair bit of capital to that sector just over 10 years ago.”
“We were attracted to the relatively good yield premium from this asset class, and also pubs and logistics. These were high-returning assets when compared with office and more traditional regional malls.”
Neighbourhood Shopping Property
Deftereos explains that smaller shopping centres were – and still are – underpinned by Coles or Woolworths on long leases. They are tenanted by specialist bakers, fruit grocers and the like – all catering to daily essential needs.
Equally importantly, there is a smaller, but deeper pool of capital for neighbourhood centres from high-net-worth private investors and small syndicates. This lends liquidity to this segment of the retail market.
Today, the Hostplus property portfolio has a 15 per cent weighting to retail, which includes major malls, CBD retail and neighbourhood centres. It also has a 15 per cent weighting to pubs, invested through joint ventures with Charter Hall Group.
“Neighbourhood centres have come out well from the pandemic, and they will continue to play an important role within the community,” Deftereos told [i3] Insights.
The Hostplus property team has also actively built out its industrial programme since the middle of last decade.
I still have conviction in the sector in the longer term, but in the last couple of years we haven’t actively been deploying capital to logistics. We have consciously paused from pouring more capital in. Given where pricing had risen to, we exercised caution
Asked if Hostplus has taken profit as demand for logistics assets has soared in the past two years, Deftereos responds: “Most of our exposure has been retained because these are long-term core holdings. Obviously, the managers we invest in may seek to recycle capital and, over time, look to divest.”
Deftereos explains that the Hostplus logistics portfolio is made up of relatively new facilities. “They were largely built by the funds that we have invested in, and we have been able to capture the development profit,” he says.
“We are now seeing the market change, with assets being repriced primarily due to rising bond yields.”
“I still have conviction in the sector in the longer term, but in the last couple of years we haven’t actively been deploying capital to logistics. We have consciously paused from pouring more capital in. Given where pricing had risen to, we exercised caution.”
The capitalisation rate for Sydney’s industrial market in 2015 was 6.75 – 7.75 per cent. Last year, yield for core industrial assets dropped to a low of 3.5 per cent. Needless to say, Hostplus’ portfolio has enjoyed capital gains during this period.
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Logistics Property
Today, 20 per cent of the fund’s circa $9-billion property portfolio is in logistics. Its portfolio is split between Australia and the US.
Across both markets its exposure is to both big box distribution centres with major tenants as well as last mile logistics assets, mainly linked to consumer staples. “We make sure that the distribution portfolio is being driven mainly by the consumer staples business model.”
Deftereos says the fund will over time invest further in logistics – but only in markets where it can tap into the primary industrial sector, which is still seeing strong demand and a real imbalance of supply.
“It is really those markets which are linked to critical infrastructure from a logistics standpoint,” he emphasises.
Deftereos says Hostplus is also now prioritising a building out of sectors like healthcare and living. He told [i3] Insights that “more attractive opportunities” are emerging in these sectors.
Today, the Hostplus portfolio is well diversified and more balanced. The fund has down-weighted its exposure to both office and retail. “We have done that in a measured way, and we try to time our divestment in a way that makes sense,” Deftereos says.
“We are not doing this to seek liquidity; it is more around portfolio construction. Where we find opportunity to sell well, we will sell, but we are not looking to sell at a material discount to prevailing value.”
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[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.