Taking development risk in data centres is a good way of maximising the benefits of investing in the sector, TelstraSuper says
TelstraSuper began investing in data centres, which became the most keenly sought-after real estate post-pandemic, in the mid 2010s.
Back then, recalls Kate Misic, Head of Alternative Investments and Real Assets at TelstraSuper, the conversation was all about latency and colocation. Today, discussions with the same managers are about building training centres for artificial intelligence (AI).
“It is fair to say our investment in this space has grown in line with how the space has been evolving.,” Misic tells [i3] Insights. “For example, previously the focus was on locations close to city centres and universities and data centres were built as somewhere for multi-tenants to colocate.
“These days, we’re focusing on large footprint data centres that have the capacity to support training for large-language models, and exposure to more efficient energy and water designs to meet the additional challenges around energy usage.
“It helps to be on a manager-led journey. We learn with them as they move into different expressions of data centre investment. They bring new ideas to us – like locating data centres in the desert with access to ample space and sunshine for generating electricity,” she says.
It helps to be on a manager-led journey. We learn with them as they move into different expressions of data centre investment. They bring new ideas to us – like locating data centres in the desert with access to ample space and sunshine for generating electricity
Moving from the inner city to the desert is an example how investment has evolved as managers move into different opportunities in the expanding universe of data centres.
“Data centres are now a popular asset investment but at TelstraSuper we have not only just started deploying into the sector, but we have also finished developments and already co-own completed assets that are AI training campuses. It is fantastic to be early on that journey, and now our managers are looking for the next opportunity for that space,” she says.
Misic tells [i3] Insights that the way to benefit from investing in data centres is to be willing to take the development risk, because buying the completed asset is expensive.
She is not, however, saying that completed data centres are not good investments – they are – but they offer a much lower return expectation, so she is more comfortable entering into a project at the development stage.
Develop to Core
TelstraSuper is familiar with develop-to-core strategies often used in acquiring prime property assets. As a fund, it has always been open to new ideas and prepared to go the extra mile.
In 2010, long before private credit was talked about as it is today being the asset class that promises the best opportunity, TelstraSuper provided a debt and equity package for a 50 per cent stake in the Adelaide Tax Office development.
The fund provided a construction loan facility of up to $117.6 million, together with a five-year post completion term facility of equal amount, bringing the total funding arrangement with the Perth-based builder Aspen Group to a total of $269 million.
Among TelstraSuper’s latest investments is an investment in renewable natural gas (RNG). It is backing its US infrastructure manager CIM Group, which is expanding its RNG platform and collecting raw landfill methane gas to convert into RNG.
“That is another fantastic opportunity. At this point, the investment is also getting credits from the Inflation Reduction Act,” Misic says.
The fund’s foray into such asset classes reflects a timeliness, with a dash of luck, that is at the essence of successful investing. It is probably fair to say that it was the same good sense of timing that insulated the fund from the worst impact of the post-COVID downturn in the commercial real estate market.
“We went into this cycle underweight office and retail, but overweight industrial, living and alternative real estate. We outperformed the benchmark during the downturn because this mix of assets provided us with resilient returns,” Misic says.
“TelstraSuper’s property option has performed well over time and we are currently focused on what we think the portfolio needs to look like for it to continue to outperform.”
As she sees it, the portfolio is lacking in retail. Misic says the time has come to close that underweight to retail, and it is leaning further into its grocery-anchored strategy with Charter Hall.
Through its long-established partnership with Charter Hall and VFMC, TelstraSuper currently owns a portfolio of Bunnings hardware retail outlets, which complements its exposure to logistics.
[Chifley South] is going to be completed at a time when there will be very little new supply hitting the market. That itself is a bit of luck with timing, because some other projects ... have been pulled.
Although office is currently Australia’s worst-performing asset class, TelstraSuper and VFMC are behind Charter Hall in the development of a second tower at 2 Chifley Square in central Sydney, Chifley South. Construction on the 37-storey building, costing $1.8 billion, started early this year and is due for completion in 2027.
“We are invested in the entire Chifley precinct,” says Misic. “There is an existing tower (Chifley North), which is well tenanted and a development site (Chifley South).
“[But when] considering development, obviously you want to have a good return on your equity that meets member expectation, especially when accounting for the risks that each development entails.
“When we look specifically at Chifley, we are building prime office and north of 50 per cent of the space in the new building is already pre-leased. We are bringing a prime project to the market at a time you won’t see many other completions at this level.
“It is going to be completed at a time when there will be very little new supply hitting the market. That itself is a bit of luck with timing, because some other projects, which were originally planned to go ahead, have been pulled. Our project is already well progressed,” she says.
On completion ,the precinct will carry a value of around $3.8 billion and for TelstraSuper, which has almost $25 billion under management, its minority share of the twin Chifley Towers will be one of its single largest investments in a $3-billion property portfolio.
“We are seeing bifurcation. The occupancy in our prime office buildings has remained high and we are seeing rental growth. Cap rates, however, have expanded due to interest rate rises,” she says.
“We are now sitting at a point in the market where interest rate will go lower, and we expect cap rates to stabilise. Overall, we have been happy with the resilience of our property portfolio and its performance relative to the industry benchmark,” Misic says.
Living and Infrastructure
TelstraSuper’s living sector exposure is offshore. It is invested in multi-family, senior and student living in the UK and the US. She says the UK market, which went down first during the pandemic, has since begun to recover. The US is experiencing a temporary supply bubble, which she expects will dissipate by 2026 or 2027.
So far, the impact on TelstraSuper’s portfolio investment is slow rental growth rather than high vacancies.
As much as 85 per cent of the fund’s property assets are in Australia, and Misic expects them to remain at this level.
The opposite is true of infrastructure. Half of TelstraSuper’s $2-billion infrastructure portfolio is offshore. While it looks to new economy infrastructure, including renewable landfill gas and data centres, to help drive its fund’s returns, Misic says there will always been a role for old economy infrastructure.
“It is about leaning into the new but remembering the kind of key characteristics of traditional infrastructure,” she says.
“There are core elements of infrastructure that are important to retain and that includes brownfield infrastructure, which has contracted, regulated cash flow, inflation linkages and monopolistic characteristics.
“There is that kind of bread-and-butter characteristic of infrastructure that makes the asset class an important part of a portfolio – not just ours but also many of our peers’ portfolios,” she says.
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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.