Dislocation in the pricing of listed real estate relative to unlisted real estate will be a business opportunity to watch in 2019 for Future Fund, the Melbourne-based sovereign wealth fund of Australia.
According to Stewart Tillyard, head of unlisted property at Future Fund, the sovereign wealth fund’s managers will keep exploring a general low valuation of listed real estate relative to the late-cycle market prices for unlisted real estate around the world for interesting opportunities.
“There is a significant opportunity globally in the public-to-private space,” Tillyard said. “When you see where REITs are priced in the US and Europe, we see material discounts in listed real estate.”
As recent examples, Tillyard mentioned how Future Fund have taken part in two major take-private deals in 2018 with its Toronto-based manager Brookfield Asset Management. In August, the sovereign wealth fund backed the real estate platform Brookfield Property Partners’ bet against the retail apocalypse with a privatization of listed GGP, the second-largest mall owner in the US, for about $15 billion. Brookfield, which already owned a third of GGP, was the only bidder when the company put itself up for sale last year.
Earlier in December, Brookfield completed the acquisition of the listed Cleveland-based Forest City Realty Trust – a privatization including capital from Future Fund. The portfolio includes 6.3 million square feet of high-quality office space, 2.3 million square feet of premier life sciences assets, 2.2 million square feet of retail space and 18,500 multifamily units. In addition, the portfolio features five large-scale development projects in the New York Metro area, San Francisco and Washington, DC.
“These mega funds, that our managers run, have an advantage to be able to acquire high quality REITs with really attractive portfolios,” Tillyard said. “That opportunity to do more public-to-private is something that we like to keep doing because we think that there is a dislocation in pricing.”
Tillyard recognizes that it requires more than just financial firepower to take on the task to acquire listed REITs and take them private. Both deep and specialized teams are needed to succeed with such strategies.
“I think that the last ten years can be described with the analogy that the rising tide has floated all boats,” Tillyard said. “Moving forward for us, we think this is a market for best in class managers.”
Future Fund relies on managers as the sovereign wealth fund is not permitted to own more than a 50 percent stake in direct real estate investments. Other than Brookfield, it has backed Morgan Stanley Real Estate Investing, Dallas-based Hillwood Investment Properties, and Seattle-based Columbia Pacific Advisors.
Future Fund had real estate assets under management for A$10.5 billion ($7.5 billion; €6.6 billion) as of end-September 2018, of which 1.8 percent was listed. Counting in investments that will counterweigh investment backflows, Tillyard is expecting that the real estate portfolio size will remain relatively consistent, because Future Fund already has moved its allocation to a defensive position where the sovereign wealth fund believes it reflects the current late cycle in developed markets.
“We are underinvested in real estate, but appropriately underinvested. Moving forward, as the fund obviously continues to grow, we will aim to take advantage of the dislocation between listed and direct real estate, while we will also see our allocation to logistics and senior housing grow, as these sectors show strong fundamentals,” Tillyard said.
Tillyard took over the reigns for Future Fund’s unlisted real estate strategy in June, when his predecessor Barry Brakey stepped down after leading the sovereign wealth fund’s foray into real estate after its inception in 2006.
Future Fund had a total assets under management of A$148.8 billion as of end-September 2016, of which real estate made up 7 percent, an increase of 0.6 percent since end-June 2018. During the same period, where Brookfield’s GGP takeover was finalized, the real estate portfolio grew with almost 12 percent to A$10.5 billion.
You can hear direct from Stewart Tillyard when he takes the stage at PERE Asia this March. Find out more on the event website.