Super funds pursue large-scale mixed-use real estate transactions despite risks | Asset owners

Two super funds have championed the investment and ESG benefits of mixed-use property developments, even as consultants point to a number of risks associated with the sector, which combines office, retail, residential, hospitality and leisure over time horizons can span decades. .

Bevan Towning, Head of Property at Australian Super, Australia’s largest super fund, said Asian investor that the fund valued the benefits of diversification and the long timescales associated with the sector, which provided an important source of alpha, to complement core beta-generating assets such as Class A offices in central cities.

“We like the diversity of occupiers, through which we can diversify both risk and return,” he said, adding that the long development timeframe provided graduated revenue streams and meant projects could evolve to meet changing user demands.

“[Developments] tend to be delivered in stages, usually over 8-10 years, so you don’t do everything on day one. You could have 5 million square feet of office, retail, residence, recreation and education on one site, with flexible planning approval that allows you to adjust [your building] as demand increases or decreases,” he said.

Toby Selman, property manager at the New Zealand Superannuation Fund (NZ Super), said the fund is considering several mixed-use investments in New Zealand in addition to the Future Urban Land platform, a $250 million new investment. -Zealand ($162 million) including large land holdings that will be rezoned and developed.

“We are looking at a few things here, which are financially suitable for our program but also for the community as a whole,” he said, adding that he would also consider opportunities beyond New Zealand, with States United and Europe. most likely candidates

Mixed-use developments, which are capital-intensive and whose components may not generate revenue for many years, also suit NZ Super’s risk appetite.

“Unlike private developers, we don’t need debt financing and have a low cost of capital, which allows us to take on large tracts of land and be patient, taking into account [factors like] zoning risk,” Selman said.

Mary Power, principal consultant and head of real estate at Jana Investment Advisors in Melbourne, said Asian investor that the consolidation of Australia’s super sector could lead to increased levels of investment in mixed-use development.

“Major superfunds that can play the very long game on mixed-use sites are large, cash-flow-positive funds with great capacity to deploy. Emerging mega funds will be able to invest in such projects.

Risks

But she pointed to the risks of such long-term, multi-sector projects, which typically exhibit the “J-curve” of negative returns in the early years. “And there is geographic and asset-specific concentration risk,” she said.

Peter Hobbs, managing director of private markets at bFinance in London, said Asian investor the risks associated with such long lead times were significant, with projects likely to go through long periods of underperformance during which investors could sell.

“It’s daring to think that [an investor] will be involved in 30 years. It’s easy to say you have deep pockets, but you might experience not just a downturn, but a long period – say, 2, 3 or even 5 years – of real distressed prices, that’s hard to overcome,” did he declare.

He pointed to Canary Wharf in London, a large mixed-use resort that weathered a prolonged UK recession and falling property prices across all sectors in the 1980s and early 1990s, before d show strong returns.

The first buildings were completed in 1991, by which time the commercial property market in London had collapsed. Olympia & York Canary Wharf Limited, the main developer, filed for bankruptcy in 1992, the development having been purchased by a consortium of investors in 1999 for £1.2 billion.

ESG ADVANTAGE

Large mixed-use plans, which typically have longer tenors and different risk and return profiles, can work well to achieve environmental and social goals, but also carry ESG risks.

Towning said mixed-use developments support the fund’s broader decarbonization goals, as the longer time horizon provides a clear roadmap for achieving a carbon-neutral asset.

Selman said the developments provide an effective way to pursue social and environmental benefits. “You can influence placemaking, creating more sustainable communities that include affordable housing, while building bottom line results,” he said.

But Hobbs said where investment offers very good returns, there can be reputational risk, local residents, politicians and other stakeholders – who mixed-use developers need to work closely with. – question benefits.

“If you’re generating a 20% or 30% IRR, people may wonder if you’re really enjoying the place,” Hobbs said. In 2018, more than half of children in Tower Hamlets, the London borough containing Canary Wharf, lived in poverty, the highest rate of all of London’s 32 boroughs.

Hobbs said the combination of these risks, and growing returns in niche sectors such as data centers and healthcare, has seen many investors avoid this sector in recent years.

“Two and a half years ago, large real estate investors were more focused on these large mixed-use buildings. But more interest through Covid has been getting access to new niche sectors,” he said.

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