ART has repositioned its real estate portfolio after the merger of SunSuper and QSuper. Florence Chong speaks with Head of Real Estate Mark Lee about opportunities in residentials, healthcare and even holiday parks
In the traumatic months following the global COVID pandemic, Australian Retirement Trust (ART) was among the first asset owners to decisively revalue its office portfolio, reflecting the new reality confronting the market.
Ian Patrick, Chief Investment Officer at ART, made no secret of the fact that the fund’s office assets faced a devaluation of 15 per cent or more, and he said so publicly on several occasions.
But the write-down was offset by the fact that office formed just a portion of ART’s overall real estate assets. The real estate portfolio itself is diversified, both geographically and by sector.
ART manages $280 billion in retirement savings and has $15 billion in equity tied up in real estate.
Two years ago, when SunSuper merged with QSuper, the enlarged fund reviewed its real assets strategy to chart a way forward in managing a much bigger pool of capital.
“Given the cyclical nature of real estate, we consider diversification beyond geography and sector, seeking investments that provide differentiated cashflow streams that will ideally improve the resilience of the portfolio over the long term,” Mark Lee, Senior Portfolio Manager and Head of Real Estate at ART, told [i3] Insights.
Given the cyclical nature of real estate, we consider diversification beyond geography and sector, seeking investments that provide differentiated cashflow streams that will ideally improve the resilience of the portfolio over the long term
“Strategically, we have a balanced approach of equal long-term sector allocations to office, retail, industrial, residential and other alternative real estate sectors. Our actual exposures have tracked fairly well to the above targets, with an underweight tilt to office, balanced with overweight to industrial and residential.”
The Living Sector
In recent times, ART has seized on opportunities in the living and industrial sectors to grow its portfolio.
“We have an allocation of around A$3.7 billion to global residential markets, with positions in US multifamily, Norwegian student accommodation and UK, Dutch and Australian aged care,” Lee says.
“Our future direction in residential will be driven by where the best risk-adjusted returns are, and will depend on demographic, macro-economic and real estate fundamentals.”
Lee says the decision to invest in a far-flung market like Norway is because the asset class meets “quite a number of our internal criteria”. As he sees it Norwegian student accommodation falls under the category of long-term strategic investments.
In Norway, ART is invested through BoColiving which is in turn managed by Heitman. The Chicago-based real estate manager also sourced the investment.
“To illustrate our conviction in the sector, when we acquired BoColiving as a platform in early 2023 it had 1,494 beds across 52 properties in Norway. BoColiving has since acquired a further 230 units across 8 properties,” Lee says.
ART’s early exposure to the residential sector offshore is through investment in the US multifamily market. Given oversupply and softening in that market, ART is cautious and selectively investing in the US.
“Multifamily is indeed in a challenging situation given the increase in interest rates leading to cap rate expansion and muted rental growth due to oversupplied markets,” Lee says.
Multifamily is indeed in a challenging situation given the increase in interest rates leading to cap rate expansion and muted rental growth due to oversupplied markets
However, he observes that assets are now generally valued at levels below replacement cost given significant construction cost inflation.
“This is leading to potential tailwinds as interest rates and, therefore, cap rates stabilise, particularly if the US continues to experience population growth,” he says.
ART is holding a watching brief. “We remain open to opportunities in the US multifamily market particularly given our flexibility to invest in equity and credit strategies, allowing us to invest in the market throughout the cycle.”
The fund also has the flexibility of investing in real estate credit investments which has helped balance the challenges in the underperformance of the traditional real estate sectors.
The US multifamily sector exhibits cashflow, inflation and real estate characteristics that help with the ART real estate portfolio diversification objective. It is, therefore, a long-term core market for ART, he says.
Healthcare
ART has broadened its exposure to healthcare. In line with ART’s focus on improving the resilience of its real estate portfolio, it looks to aged care, a sector which also exhibits characteristics that meet the fund’s internal investment criteria.
Recently, it invested with a UK manager via Elevation Healthcare Properties, which owns a portfolio of 37 assets. It added 11 assets to its portfolio in March this year.
“Supply and demand dynamics are particularly interesting in aged care given the aging population supporting demand. The sector is further supported by muted supply growth as the rate of development of new properties barely catches up with the obsolescence of older properties that are no longer fit-for-purpose, based on ever- evolving regulatory and consumer standards.
“Our strategies with Elevation Healthcare are across equity and credit investments in the development of modern, fit-for-purpose aged care properties that are underpinned by high-quality aged care operators.”
Elevation has delivered solid returns over the past couple of years, despite of the challenges the healthcare industry faced during COVID.
Beyond Residential: Caravan Parks
Not strictly residential, but an adjacent investment for the fund is its caravan park business, the now wholly-owned G’Day Parks, owns and operates some 280 parks around Australia.
“G’day Parks has been a strong contributor to ART’s real estate portfolio from a risk-adjusted return perspective,” Lee says.
“The G’day business has a diverse range of revenue streams with parks located across Australia, delivering a differentiated cashflow stream compared to traditional real estate asset classes.”
The business has performed strongly over the 2024 financial year, benefitting from “robust park visitation” across caravans, camping sites and workstay properties, he says.
“The original investment thesis that holiday parks can have defensive characteristics held firm during the post-COVID period, with the strong performance of G’day Parks helping balance portfolio outcomes in light of stressed valuations in the traditional real estate sectors.”
The original investment thesis that holiday parks can have defensive characteristics held firm during the post-COVID period, with the strong performance of G’day Parks helping balance portfolio outcomes in light of stressed valuations in the traditional real estate sectors
ART’s exposure to the Australian industrial sector has increased through its joint venture with Mirvac. In March this year, ART and Mirvac launched their latest venture – the development of 56 hectares of land into a new industrial estate at Mamre Road, Kemps Creek in Sydney’s west. The asset, with an end value of $560 million, will provide 247,000 square metres of space.
ART and Mirvac have formed the Mirvac Industrial Venture, with ART taking a 49 per cent stake in the vehicle in 2023. It is seeded with what is known as Switchyards, in Auburn, in Sydney’s inner west. Mirvac also manages ART’s portfolio of more than A$750 million in direct property.
Lee speaks of ‘a proven formula’ of working with selected partners like Mirvac, Elevation, Heitman and a small handful of other managers.
The Partnership Model
“We continue to focus on the external partnership model. We are, therefore, seeking to build meaningful Australian and global partnerships that can deliver strong risk-adjusted returns in diverse real estate sectors, giving our team the ability to curate a resilient, global real estate portfolio,” he says.
Looking forward, Lee says ART is ‘generally agnostic’ in relation to investment structure. “We have invested directly via JVs, clubs, real estate operating companies and funds. We believe flexibility is important to allow us to select the best risk-adjusted return approach across regions and sectors.
“Our current investment approach is dependent on the region, focusing on areas and sectors where our capital might command a premium,” he says. “Our current focus is, therefore, on disciplined deployment in investments that reward the availability of liquidity, particularly given the challenging real estate market environment.”
International diversification has been – and will be – a key focal area for quite a number of years, Lee says. “ART’s real estate investment program is now evenly split (50/50) between Australian and International investments, with the majority of the international program focused on the US.”
The fund has seen more opportunities being presented offshore, given the swiftness of interest rate increases that led to cap rate expansions, creating elements of stress, Lee says.
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