Portfolio construction key to looking through economic disruption
There needs to be greater value placed on portfolio construction to reduce risk in allocating commercial real estate portfolios, according to Jennifer Johnstone-Kaiser, Principal Consultant and Property Leader at Frontier Advisors, who was speaking at the PFA 2023 Conference in Canberra.
“There are challenges in implementing portfolio strategies or re- balancing during the current economic environment and all its complexity”, Ms Johnstone-Kaiser said.
“Investing in real estate is a long term proposition. Investors need to take into account the key characteristics of the asset class, and keep an eye on risk-adjusted outcomes.
“At Frontier, we look at our clients’ overall objectives and try to design a configuration for each of them.
“Any strategy must consider liquidity, which must also be available when you need it. This is a key question for portfolio construction. Do you want a defensive portfolio, or a liquid portfolio?
“If liquidity is the goal then there is volatility to consider.”
Ms Johnstone-Kaiser said portfolio construction manages risk via diversifying on many levels. “Diversifying in real estate can include different geography, different size and maturity of markets, different liquidity characteristics, along with sector exposures and the vintages of the investments.”
Some key trends influencing portfolio construction include the growing interest in ESG and sustainability. “This is a big, long-term trend. For example, we are working closely with managers to understand and monitor their initiatives to achieve net-zero carbon.
“Australian managers are relatively well-placed and are ahead of some international peers in many respects. However, there is significant disparity in target dates and managers’ initiatives.”
In overseas markets, Ms Johnstone-Kaiser said the push toward more sustainable property investment was coming from different sources. “In Europe, the pension funds are leading the push. In the USA, city, state and other regulatory bodies are pushing ahead with stringent and sometimes punitive legislation.”
She said that while buildings with the best sustainability credentials warrant a rental and sales premium, this premium may contract as more sustainable assets achieve higher ratings.
Another key trend for real estate investing is ageing society. “Real estate is always driven by demographic trends. Ageing populations represent a challenge and an opportunity. There is huge and growing demand for housing, health care, and aged care.
“For these reasons we have been supporting ‘needs-based’ assets, such as healthcare, multi-family housing, and aged care over the last five years.”
Investing through the cycle
Current economic conditions are pausing investment activity, according to Ms Johnstone-Kaiser. “We advise clients to invest through the cycle. Often, distressed conditions provide the opportunity to access good vintages.
“Investors should consider managers with good track record of buying well – the economic cycle is currently falling and historically it provides an opportunity to buy into markets that are re-priced.
“The cycle will turn eventually. It always does. And it can move quickly on the way up.”