Brookfield Asset Management has maintained a contrarian view on the office and retail sectors throughout the pandemic, choosing to persevere with its exposures to the asset classes, even adding to them in certain markets.
Institutional investors have demonstrated their support. Last week, the Toronto-headquartered manager said in its quarterly earnings call it had raised more than $9 billion in the first close of its latest opportunistic fund, Brookfield Strategic Real Estate Partners IV, against a $17 billion target. Chief executive Bruce Flatt said Brookfield was able to raise more capital in a quicker timeline for this vehicle compared with the first close of the $15 billion BSREP III.
Brookfield does have a diversified asset mix across its core and BSREP opportunistic strategies. Nonetheless, a mega fundraise, completed at such pace, demonstrates how investors are giving a major vote of confidence to a group that continues to have conviction in the two troubled sectors. This support comes despite institutional circles expressing just as much doubt about the prospects for offices and retail.
Particularly the latter sector. According to DWS Group’s US Real Estate Strategic Outlook published in July, covid triggered a heavy blow to the already ailing retail sector, with total returns at -6 percent in Q1 2021 due to the impact of store closures and bankruptcies on net operating income. Total returns for the office sector were at 1.3 percent, with the sector seeing the “largest decline of net absorption in history” during the quarter, the firm said.
However, Brookfield sees distressed times like these as also ripe for opportunistic purchases. Brian Kingston, chief executive of Brookfield Property Partners, told PERE in October the firm was keen to add more exposure to gateway cities like New York, London, Sydney, Toronto and Los Angeles through office as well as other investments. The firm feels similar about shops. In June, the firm acquired a retail portfolio in China from Abu Dhabi Investment Authority for approximately $1.4 billion through a value-add-opportunistic investing approach. This was preceded by its purchase of a portfolio of seven retail parks from UK retail property company Hammerson for $475 billion in April 2020 while the world was in lockdown.
The firm also wants to continue holding on to its core retail and office holdings over the long term and ride out any short-term pandemic-triggered volatility. As Flatt highlighted during last week’s earnings call, the plan to monetize assets from Brookfield Property Partners will not include its major office and retail holdings. “Approximately $16 billion of this equity capital is invested in an irreplaceable portfolio of high-quality, mixed-use office and retail anchored properties in global gateway cities,” he said. “On balance, we intend to hold these assets for a very long time, if not forever.”
For every contrarian investor extolling the virtues of office and retail, there are as many naysayers pointing toward the severe disruption and existential crisis these sectors are facing today. But Brookfield’s investors are evidently veering on the side of optimism; with 18 percent gross IRRs for its opportunistic flagship Strategic Real Estate Partners fund series inception, according to its 2020 year-end report, that is understandable.
But they say past performance should not be considered a guarantee of future returns. Brookfield’s past performance has been strong. With offices and retail properties experiencing such uncertainty, however, institutional bets on convictions behind the two asset classes are noteworthy.