Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Pricing power is the only counter to inflation pressures
‘A thief in the night’ was the title of Stephen Hayes’ session at last weeks’ Equities and Growth Assets Symposium hosted by The Inside Network. Tasked with confronting the most significant and pressing issue facing investors and asset allocators around the world, Hayes managed to summarise it quite simple ‘pricing power’ is what really matters.
Having spent several decades investing in property and seeing the sector evolving significant from the traditional retail and office dominated opportunities of the 1990’s, he reflects on the past to find solutions to today’s issues. Inflation isn’t new, of course, but it is poisonous, represent an increase cost of doing business and higher cost of living for households.
Whilst the most common reasons for inflation are well appreciated, Hayes stresses the important of looking at inflation “wholistically” rather than just consumer-facing or CPI prints. That is, to look at inflation that is occurring at every part of the supply chain, in asset prices, manufacturing and most importantly for real asset investors, in the cost of constructing new properties.
One of the most common errors that advisers make when constructing portfolios, is oversimplifying, or simply accepting the conventional wisdom; in this case being that all property provides a solid inflation hedge. Hayes warns against this, suggest advisers “cannot generalise the inflation hedge of property” and assume it all works the same. Whilst many refer to the unique benefits of triple-net leases or the inclusion of terms that allow inflation-linked increases to rent every year, his view is that “the inflation hedge of property has nothing to do with lease structure”; it is ‘irrelevant’ he explained.
What is more important is investing into property in partnership with groups that have significant pricing power. That is, teaming up with high quality tenants, building more custom, amenity-plus properties and having the opportunity to expand as one’s tenants also expand. It is by assisting tenants to use your property more effectively that you are able to gain expansion opportunities, greater use of floor space and ultimately higher cash flow.
He highlighted a number of major structural trends that are still accelerating as potential sources of this ‘pricing power’ with e-commerce, machination, renewable energy and data consumption just a few of the most powerful examples. Pricing transparency from the proliferation of smart phones has been very deflationary and the result has been that “the only way companies can compete is on availability” no longer on price. That means, they are investing heavily into logistics, distribution and the ‘last mile’ to the benefit of niche property owners.
And this trend is unlikely to slow because “how we are living, working and playing is changing”. Capital flows are quickly moving from the old world of manufacturing, fossil fuels and freeways to the modern economy driven by health, digitalisation and content. The key is knowing who the winners of this will be, whether data or logistics centres, and backing them in.
“The real estate sector is a massive beneficiary of these new world investments” he explained, despite the perception that it remains old fashioned, with old world offices and malls now less than 5 per cent of the investable universe.
In terms of the outlook, Hayes suggests investors are wary of sectors ranging from traditional CBD offices to student housing and childcare, preferring niche opportunities in warehousing, logistics and niche retail.
