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Innovative approaches open real assets to the masses

In Practice

The United Nations has described the managers of global real estate assets as ‘one of the most important decision-making groups on Earth’. Whilst originally referring to the implications that property investment and capital flows can have on the environment and the economy, the comments have additional meaning amid a surge in inflation around the world.

After balanced funds deliver the worst quarter in modern history, the challenge of delivering both income and inflation protection for client portfolios is very real. Sophisticated investors including pension and sovereign wealth funds have traditionally relied on an influx of contributions from younger members to leverage the benefits of illiquidity for the clients.

This strategy, which centred around private markets and real assets including private equity, venture capital and commercial property, allowed them to take significant duration risk but without the volatility associated with public markets. Yet for those in drawdown or retirement phase, the need for liquidity is real, as is the need for flexibility and changes of strategy.

  • The challenge, as we are seeing today, is that the flexibility that comes with higher liquidity, also comes with significantly higher volatility. Volatility at its worst can easily push even the most patient investors to change their approach. Yet there is a growing cohort of managers seeking to address these issues and by providing more innovative alternatives that seek to leverage the benefits of both liquid and illiquid property.

    Two groups operating in the sector are homegrown group Alceon and global asset manager Invesco. Through their Alceon Australian Property and Invesco Global Real Estate Funds, the groups are seeking to offer exposure to the booming commercial property sector, but with the benefit of liquidity.

    Having been central to the success of the institutional investment industry, inflation is once again bringing out the key benefits of commercial property and other real assets. That is, they have built in inflation protection mechanisms, in the form of CPI-linked rent, along with the ability to pass through most costs to consumers, but more importantly there is surging demand for property and higher replacement costs as key inputs experience global shortages.

    These two strategies, one which focused on the domestic market and the other global developed markets, both invest in a ‘liquidity sleeve’, in the form of a portfolio of sharemarket-listed property trusts and similar securities. Alongside small holdings in cash, this affords management and investors the flexibility to sell liquid assets to meet redemptions, rather than be forced into selling less liquid unlisted assets as has occurred in previous crises.

    They aim to balance the benefits of illiquidity, traditional left only to the super wealth, with a listed proxy for the real estate sector. In the case of Alceon, this is achieved through a 50/50 split between listed infrastructure and property assets, spanning the likes of Goodman Group, Vicinity and Transurban, and 50 per cent in unlisted, including both debt and equity ownership. For instance, they hold a sizeable stake in AMP’s leading Office Fund.

    It is a similar story for the Invesco strategy, which due to its size and popularity with institutional investors, holds 70 per cent in global unlisted property, with the remaining 30 per cent in listed markets across Asia, Europe and the US. The key benefit both of these strategies offer during periods like today, is flexibility in where each new dollar of profit or investment is allocated. It can be used to invest in the most attractive sector or part of one of the most diverse and oldest asset classes in the world at any given time.

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