Hostplus Eyes UK, Europe

Hostplus investigates expanding its property allocation in Europe and the United Kingdom, Spiros Deftereos tells Florence Chong. But the US remains a key pillar of its strategy

Hostplus, which already has significant investment interests in the United States, is poised to explore investment opportunities in the property markets of the European Union and the United Kingdom.

“Europe obviously has some long-standing economic challenges, and it is a harder market to access for offshore institutional investors,” says Spiros Deftereos, Head of Property at Hostplus.

“There are structural and cultural nuances across each jurisdiction. So, investing in France is not going to be the same as investing in the UK.

“(But) in saying that, from a value-add, opportunistic standpoint, we are starting to see compelling opportunities emerge in some markets where, over time, the real estate fundamentals in terms of population and economic attributes have been sound.”

As to timing, Deftereos says: “I would envisage over the short to medium term, we will likely look to start our (investment) programme in the UK,Europe. But at this stage we are still very much in our investigation phase.”

Initial areas of interest for Deftereos will be primarily in the living sector, where there is already significant institutional investment.

For the moment, Hostplus remains focused on the deeper and more liquid US market.

US Investments

As of March 31, 2023, around 25 per cent of the Hostplus real estate portfolio of $9.3 billion was resident in the United States.

Since 2018, when Hostplus launched its offshore investment programme, the super fund has built up a diversified portfolio in the US to complement its Australian portfolio.

Deftereos says the key reason for having the offshore programme is to enhance diversification of the fund’s property portfolio.

The US, he says, was an obvious first offshore choice because it gives the fund access to alternative real estate sectors, such as multifamily, healthcare and medical offices. These continue to be difficult to access in Australia at scale and of institutional quality.

Hostplus dipped its toe in the US market through a small investment in a diversified sector fund. This fund was invested in the traditional sectors of office, industrial, retail and multifamily. Deftereos says the investment was useful because “it gave us a level of intel on primary core sectors within the US”.

Since then, the fund has taken a “much more targeted” approach, focussing on the living sector, logistics and newer areas such as medical office.

The US, he says, provides exposure to a broader set of economic, but more importantly, structural drivers.

“We are looking at how to tap into secular trends like demographics, an ageing population and technological advancement. If you look at the senior living or healthcare real estate sectors, these are underpinned by demand from an ageing demographic.”

It was technological advancement that drove development of e-commerce, where the industrial sector has been an obvious beneficiary, he says.

“We were thankfully an early mover in investing in industrial over 10 years ago, initially domestically and then offshore,” Deftereos tells [i3] Insights.

The US multifamily is a large and established sector, he says, where products have been created to provide affordable housing for middle-income earners and millennials.

The $100 billion Hostplus particularly looks for a product that caters to the middle market, and that, he says, “has been the core of our US residential strategy”.

He adds: “To date we haven’t seen that type of product being delivered in the Australian market in a manner that delivers the same appropriate risk-adjusted returns.”

Living and Alt Offices

Deftereos is looking at a new category in the living sector – single housing (as opposed to apartments) – which is yet to emerge in Australia.

“The single housing dwelling (SHD) sector is a growth area, and it is the most recent addition to our living strategy,” he says.

In total, Hostplus has allocated close to 15 per cent of its total property weighting to the living sector. “We see this as an important part of our strategy – it is a great diversifier of traditional sectors in our domestic real estate holding.

“It is a sector that we have been able to successfully invest capital into in the US market, which is more mature – and one that has strong institutional support.”

Hostplus and three other industry funds recently invested a collective $284 million in the Nuveen Cities Workplace strategy. They were the first investors globally to support this strategy, which was launched by the US fund manager.

“The Nuveen vehicle is looking at alternative office – things like life sciences and more tech-oriented office space that has a specific use.

“Tenants are stickier because this type of office provides more bespoke needs than the traditional office. It is a new prong to our strategy in the US, and that is where we have made a relatively small investment, at least initially.”

Deftereos flags this type of asset as likely to play an important future role in the fund’s US investment strategy.

In healthcare, he says, in the US market to date the fund is exclusively invested in medical offices. “If you look at the thematic there, it is really strong. Besides having creditworthy tenants, these assets are forming part of essential health services.”

Deftereos says medical offices are taking over from traditional outpatient facilities as increasingly American hospitals look to outsource a variety of services, from primary care to specialist services, to these medical offices.

In many instances, they are co-located with the hospital, and specialists work out of both these facilities and the medical centre, which provides day surgery, longer-term care and post-surgical care.

“Medical offices play a very important role in outpatient services in the US,” Deftereos says. “We like it as a real estate investment because of the durable income profile – tenants sign up for long-term leases and the retention rate is much higher – generally more than 80 per cent, which is much higher than traditional office.

“As an asset class, it ticks a lot of boxes for us, because of the essential use.”

Asked if there could be pockets of opportunity in the highly-stressed US office market, Deftereos says: “There are different demand drivers at play there. If you compare with the Australian office market, the US has many office markets and submarkets.

“There, corporate tenants are prepared to be more transient, and relocate their headquarters if it suits their needs – particularly their financial needs. Local and municipal governments offer competing incentives and tax environments to corporate tenants. So, tenants can move easily from one state to another.

For Hostplus, there is plenty of scope left in US alternative sectors for its capital. “Our focus continues to be largely on alternative sectors, and we are prepared to move up the risk curve,” Deftereos says.

“If you think about medical offices or senior housing in the US, there is still a lot of non-institutional capital holding the real estate. Opportunities will also arise when healthcare operators who hold too much real estate on their balance sheets look to sale-and-leaseback arrangements to release capital for their core businesses.”

Hostplus is looking to the US midmarket for further opportunities to invest its capital. “We are starting to see some market stress, particularly through liquidity constraints. We feel that that will create compelling opportunity in the value-add spectrum.

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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.