Some 30 years after it was established in 1974, New Zealand’s unique no-fault personal injury insurer, the Accident Compensation Corporation (ACC), started to look at property to broaden its portfolio of investments.
It was then that Ian Purdy, an equities analyst with Swiss global bank UBS, was recruited to manage the listed property portfolio for the insurer’s investment fund.
From Public to Private
Purdy began building up a modest portfolio, initially consisting of just listed property securities, leveraging off his deep knowledge of the workings of the public market to construct a portfolio. Over time, that portfolio grew, and, at one point, ACC owned 9% of the free float of the listed property sector in New Zealand.
“It became impossible to keep outperforming the benchmark index with such a large portfolio,” Purdy told [i3] Insights. “So, we started looking at investing in property in the private market.”
ACC purchased its first direct real estate in 2005. The strategy has been to acquire assets which are straight-forward and, for a passive investor, easy to manage.
It became impossible to keep outperforming the benchmark index with such a large portfolio. So, we started looking at investing in property in the private market
To Purdy, the choice was obvious. The assets had to be industrial properties and ground leases. These asset classes are best suited to passive investments. They are what Purdy describes as “relatively low management touch” investment. Purdy likes the fact that they attract core tenants who take out long-term triple net leases. “The leases in our portfolio are typically for at least 20 years – which are longer than the usual longer-term leases of just eight years in New Zealand.”
Venturing into Industrial
At the time, most other institutional investors focussed on office and shopping centres. A joint venture between Macquarie and Goodman had only recently taken over management of the Colonial First State Property Trust and begun to transform it into a large listed industrial property fund. Then, market sentiments changed.
The exponential growth of online and the accompanying insatiable demand for warehouses and distribution centres grew in sharp contrast to weakening demand for office space and shopping centres, especially during the pandemic lockdowns between 2020 and 2021.
Purdy saw the changes in demand which drove asset prices to new unchartered territories. Yields on industrial properties dropped from a high of 7%-9% to 3.5%-4% with prime assets in the low 3% range at the peak of the market in 2022. Suddenly, industrial has become as expensive as prime office and super regional shopping centres.
“I wish I could claim we have some great insight that industrial would massively outperform; I think a big driver for us was the ease of management, and low management expense ratio. By contrast, retail and office tend to have lots of tenants who have high expectations. So, there are plenty of maintenance work to do and lots of churning of leases that need to be done to optimise the portfolio.
“With industrial, we could sign up tenants on long term leases with one tenant per property, which is much easier than managing a shopping centre which has hundreds of tenants.”
Looking back, Purdy says industrial has been ACC’s best performing assets. Although values have gone up in line with greater demand for the asset class, he says the ACC did not invest with an expectation of huge capital growth. In fact, he recalls capital growth was “probably” not there in the early days. Yields were relatively higher because people typically did not expect much capital growth out of industrials.
I wish I could claim we have some great insight that industrial would massively outperform; I think a big driver for us was the ease of management, and low management expense ratio.
But he adds: “The other thing that we were cognisant of is land values. They were relatively lower in industrial, so there was plenty of scope for appreciation.”
Taking up Development Risk
In the wake of an influx of capital over the past five years driving down returns, Purdy decided it was time for the ACC to develop its own assets. The insurer turned into a developer, working with like-minded partners including groups like C3 Construction.
ACC provides the capital while its partners source sites, project management and construction. Purdy says the C3 team has been able to source some good projects. The quid pro quo is ACC enjoys development margins and earlier involvement in the planning and development of projects, while the partner has the benefit of financial backing. “There is good synergy in such partnerships,” he says.
The cycle for industrial is showing signs of running out of puff. “I think along with other real assets in the last year or two, valuations have been falling. Industrial land value at the minute is starting to slow as vacancies are rising. One reason is rents have become unaffordable for new builds.
“The vacancy is mostly in the sublease market. There are lots of tenants who have committed to a new build while they are still leasing an existing facility. And previously they would have been able to easily sublease that older facility to someone body else. Now it is proving difficult. “
Future Projects
The ACC has a small exposure to office and retail. Currently, it has a joint venture with Ngāi Tahu Property to develop Ōtepoti, a state-of-the-art office building that will house the insurer’s Dunedin-based operations. The project due to be completed next year is ACC’s first office development.
Affordable housing is a relatively new investment for ACC. “We have a joint venture in the living sector with a community housing trust called ACCORT. The joint venture is an innovative funding partnership between ACC and CORT Community Housing, explains Purdy.
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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.