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James Maydew on how demographics drives real estate

James Maydew is Head of Global Listed Real Estate at AMP Capital.


GH: How do you manage global real estate selection from Australia?

JM: We have team members all over the world. We firmly believe that real estate is a local game. Boots on the ground are really important. We have teams in Sydney, Hong Kong, London and Chicago operating across every time zone. My own location is not the most important issue, the locations of my team are.

GH: And do they go out and kick the tyres on every asset you buy?

JM: We're investing in listed securities, so kicking all the tyres is hard because there are thousands of properties. But it's important to engage with the company and understand the management team and the second layer, the third layer, the fourth layer of the team. And seeing the real estate is vital. I'm a real estate person by trade and our team understands the bricks and mortar. We all travel a lot.

GH: How do you cover Asia and what are the opportunities there?

JM: We think about AsiaPac as a region, and we have a team here in Australia and a team in Hong Kong. The primary markets are Hong Kong, South Singapore and Japan, and we also cover China, the Philippines, Korea, India and Vietnam. We have three people in Hong Kong, and our most recent hire there is a native Japanese investor because Japan is a difficult market and you definitely need local connections.

GH: What’s the global distribution of your assets?

JM: About 60% in North America, 25% is in AsiaPac, and the balance is in Europe. It’s a US-centric capability. The US is the most liquid and deepest real estate market in the world, with the most opportunities.

GH: Other than the size and liquidity, is there something about the dynamism or growth of the US that attracts you there?

JM: Well, think about the asset classes. It's not just the three typical groups that you see in many other parts of the world, which are retail, office and industrial. The US has many other exciting sectors. There’s multi-family residential, manufactured housing, storage, aged care, healthcare, forestry, prisons, data centres - all in the listed format. They are truly institutional. It will take 10 years for Australia to look like the US does today.

GH: What are some trends, demographic or consumer or company, that you really like?

JM: Demographics drives everything. We have a massive focus on long-term demographic trends. For example, we’ve got 20 years of Baby Boomer retirement, which will put pressure on aged care facilities and the healthcare system. How do you manage health? We're invested in companies that focus on life science, which is combating health challenges. About 10,000 diseases exist and only 500 have been dealt with. That’s a long runway.

On the other side of the coin, we have the Millennials and their acceptance of technology, and how they interact with consumption. Commerce on mobile devices is still in the early phases of its trajectory. Retail is going online and we want exposure to the industrial facilities that benefit. In the US, for example, there's far too much retail, so you have to watch that segment. Index funds are simply not managing that risk.

GH: So the success in industrial of Australian companies like Charter Hall and Goodman is happening all over the world?

JM: Absolutely. In fact, Australia is playing catch up. The UK is leading, there is greater ecommerce penetration in the UK than any other market in the world.

I'm now thinking about 5G, because a lot of real estate investors ignore it. It’s positive for three sectors in particular: logistics and ecommerce, communication towers and data centres. Data is growing at a phenomenal rate, and with 5G the demands and the movement to the Internet of Things will create even more data.

GH: You mentioned manufactured homes. What demographic change is that tapping?

JM: It's also linked to the ageing population. In the US, affordable housing is a massive issue. Manufactured housing is an affordable alternative to owning your own home or renting. We focus on housing parks that are located in the warmer southern states, which attract the snowbirds, including from Canada.

GH: Older people are tired of the cold?

JM: Yes, they want a higher quality of life and for many, that means better weather. The parks we focus on are typically age-restricted, and provide a service with the facilities and environment for people to engage with like-minded folk. It’s not about trailer parks or the lowest cost alternative. It’s a community location for retirees.

From an investment perspective, the return on capital is strong because we typically own the land and the tenant owns the building. They manage and pay for the cost of the maintenance and upkeep of that building, and they pay for a ground rent and the services. Rental growth is consistent and it’s recession-proof because it’s affordable housing. Not everyone sees that as institutional real estate but we look at the cash flows for our investors.

GH: In Australia, institutions struggle for exposure to residential property but there are better opportunities overseas, such as multi-family dwellings. Do you have much exposure to residential overseas?

JM: Well, just looking at the US multi-family market, it’s absolutely massive, about 8% of our benchmark.

GH: What's the benchmark?

JM: It’s EPRA NAREIT (Ed, European Public Real Estate Association North America Real Estate Investment Trusts). These residential apartment buildings are considered truly institutional. The servicing is done with technology using professional management and it’s coming to Australia.

GH: This is where a fund owns an entire building with say 200 apartments in it?

JM: Yes, and they have the systems to understand the best opportunity to push up rates when occupancy is full, and create an environment and facilities which people are willing to pay for. They make it a great place to live, and people stay or come back.

The German residential market has also become a massive investable universe. Unlike Anglo nations, Germans don't tend to own their own home. They’re happy to rent but not for one year, more like 12-year leases. It’s logical. Just think about the financial leverage and risk to acquire a single asset with no diversification benefits. And then they sign a 25-year mortgage to pay it off.

GH: And their first investment outside their home is residential investment property.

JM: More people should think about using their own capital to invest for better returns and their dwelling is just consumption. But the Anglo mindset is different.

GH: Do you have Australian assets in your global portfolio?

JM: Yes, Australia is a really important market for AMP Capital. The main sector that excites us today is industrial. We believe Australian industrial is five years behind the US and UK with significant growth to come, and investors are underpricing it.

GH: Do you have a couple of listed favourites in Australia?

JM: Well, it's difficult to play the industrial sector in a highly diversified way. Goodman Group and Charter Hall have done well. Some people think they are expensive but we believe they will grow significantly larger in a sustainable way. They have capital-light business models.

Industrial is about the reconfiguration of supply chains and it’s multi-level. The factories that were near the cities have become redundant and are often converted to residential or office or whatever else. It means the industrial supply, or land close to the consumer, has been shrinking. And that's a global issue at a time when the customer expects delivery of products in a very short period. If you don't get that, your business is not viable.

GH: The whole last mile trend as well.

JM: Yes. We believe rental growth expectations in this asset class are understated because there will be a step change in the ability of landlord to move rents up. Even a bricks and mortar retailer must deliver products quickly. The most expensive part of supply chain management is transportation, typically 50%. So if they can cut that down by being closer to the customer, they can invest more in real estate, which is typically under 5% of costs.

GH: An investor looking for exposure to this space could just say, “I'm happy with this asset class, I'll just go into the index and save active fees.” How does your fund differ from the index?

JM: So this paper that I've written brings that to life, focussed on the Australian market. (Ed, attached here in our White Paper section). Billions of dollars in this sector have gone into passive investing, and that's been okay in the past. But in future, investors should not buy a passive fund because half of the assets are in a declining retail segment. There's a strong case for active management in this asset class.

GH: Listed property performed terribly during the GFC. Have the lessons been learned?

JM: Yes. Australia was the poster child of all of the things you should not do at the top of a real estate cycle. Leverage was too high, management teams went into markets with no competitive advantage, overpaying for assets and not managing their debt.

So where do we sit now? None of those companies or boards or investment committees ever want to go back there. The lessons have absolutely been learned. Most businesses have reduced their leverage in line with the cycle. They respect the cycle.

There’s also better understanding that the real estate market is more localised, driven by local real estate cycles.

GH: It’s about that building in that location …

JM: Exactly. So people talk about the challenges of retail, but you can still have some great retail. You have to understand the socio demographic. The way we see active management is that when a market becomes more challenging, we'll sell that market and move money elsewhere.


Graham Hand is Managing Editor of Cuffelinks. AMP Capital is a sponsor of Cuffelinks.

James Maydew is Head of Global Listed Real Estate at AMP Capital. The managed fund can be accessed on the ASX via the AMP Capital Global Property Securities Fund (Unhedged), ASX:RENT.

For more articles by AMP Capital click here. For the White Paper by James Maydew, click here.



State of play in listed real estate

Mark Roberts (AMP Capital)
July 01, 2019

The unlisted Global Property Securities Fund is AUD hedged, and the listed ASX:RENT is unhedged.

June 27, 2019

Why isn't the portfolio hedged, so that I can extract the genuine real estate gains and income and not have them eroded by currency changes (rise in the Aussie dollar, in this case).

Warren Bird
June 28, 2019

Hi Frank, I can't answer specifically for the fund in the article, but I can venture a suggestion about why it isn't currency hedged.

Although there are hedged equity funds out there, it's not normal. This is largely because of the volatility of the value of equity investments. That means that even if you hedge today's value, in a couple of weeks time, before the hedge rolls off, the assets will have a different value. If they went up in value, then you're underhedged again, but if they've gone down in value, then you're overhedged. That situation creates its own performance impact.

Also, the cash flow in equities is not predictable, so working out what future value to try to hedge is imprecise. Dividends aren't known until they're declared.

So that means that it's hard to accurately hedge a share or property portfolio. It's possible to hedge approximately, but it creates some hit and miss that mean it's often regarded as being a nuisance rather than helpful.

Another reason may be that the real estate gains you anticipate are earned over the longer term, not over the short term. Over the longer term the AUD may be up or down or unchanged - but it's usually regarded as creating only short term volatility, not providing a trend component to investment returns.

With those issues in mind, keep in mind that hedging creates cash flows. When the AUD rises, you get a cash payment when you roll a hedge position, but when it falls, the fund has to make a payment to cover the hedge loss. To cover this might require an additional 5% or more to be held in cash, which creates another possible performance drag.

This contrasts with hedging global bonds. Bond capital values are quite stable and their interest payments are totally predictable and where covering cash flow obligations is a lot simpler. So hedging is quite straightforward in that asset class.

I wrote about the mechanics of FX hedging a while ago in this article:

Some of it's a little dated (eg the hedging premium has eroded, at least against the USD), but hopefully it's helpful to explain the points I've made in this comment.

June 30, 2019

Actually Frank, their unlisted AMP Capital global property securities fund is fully hedged!
Have a look at their website

SMSF Trustee
July 01, 2019

But that's not the fund that's discussed in the article, which is a fund of listed REITS.


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