“The Abu Dhabi Investment Authority stands head and shoulders above other global investors.” That citation sits alongside the sovereign wealth fund’s number one position in PERE’s annual Global Investor 50 ranking, published alongside last month’s issue. The ranking reflects equity committed to the asset class.
While ADIA’s actual exposure is not something it publicly discloses – it consistently articulates a 5-10 percent allocation to the asset class – beyond dispute is that the institutional investor is operating a real estate platform at a scale and sophistication that most institutions can only imagine. Managers and fellow investors alike look to ADIA for signals about what it is seeing and, more importantly, doing in the market. Unsurprisingly then, recently promoted global head of real estate Tom Arnold’s interview with PERE’s senior editor Jonathan Brasse was complemented by a full room at PERE’s New York Summit last month. Here is an abridged version of their conversation:
PERE: What’s the view from the top right now? Give us an idea of your initial priorities since taking charge.
“We spent a lot of time thinking about how tomorrow might differ from today and how we’re not going to continue doing the same things just because they worked in the past”
TA: After my appointment, I spent my first four to six weeks taking stock of what we had and where we wanted to be. I spent a lot of time with constituencies across the entire organization. A lot of the conversation was along the lines of ‘What would success look like?’ and ‘How is the industry likely to change?’ It was about trying to decide if we had what we wanted and, if not, what would we want to be different? We adopted an aligning narrative: it’s about the people, it’s about the portfolio and, ultimately, it’s about the performance. If you get the people and portfolio right, the performance comes from that. We spent a lot of time thinking about how tomorrow might differ from today and how, as a result, we’re not going to continue doing the same things just because they worked in the past.
PERE: It sounds like ADIA is going through a period of introspection. Is there a correlation between that and what I’m reading in your annual review where words like ‘consolidation’ and ‘moderation’ crop up in terms of hiring and investing?
TA: From a philosophical standpoint, achieving success is a lot easier than maintaining success. I think the best organizations re-evaluate and reinvent themselves on a continual basis. If you don’t do that, you’ll fall behind over time. Consolidation: I don’t know if that would be the first word that comes to my mind. I do view this period as one where we’re not trying to grow the portfolio by 25 or 40 percent a year. But we’re still growing. Our appetite for the real estate sector remains strong.
Very few businesses are going to be the same year after year. There are upgrades, there are changes, there are improvements, there are steps taken to keep things fresh. And so we think a lot about that. How do people live? How do people use office space? How do people consume? How do people shop, commute, migrate? There’s been dramatic migration across the US in recent years, for instance. There are cities that are beneficiaries of that and there are cities that are not. Keeping track of those things and factoring them in doesn’t mean you can’t find good opportunities in weaker markets. But they can be harder. You’d rather have the wind behind you than in your face as you’re looking to those opportunities.
PERE: And on the recruitment front? You were once an organization with a handful of real estate professionals. Today, you have one of the deepest benches of any institutional investor.
TA: There was a period when we were building the team where we were very focused on making sure we had depth and could be competitive on the global stage. It was a multi-year effort and we learned a lot. We didn’t restrict ourselves to comparing against other sovereigns. We looked at the best managers in the world and said this is really the standard with which we would like to compete.
PERE: But why, given the capital you serve is so much longer than the limited life money of many managers?
TA: Because these organizations have been able to generate consistent performance over time, not just through a good run on a particular vehicle, but on a year-on-year basis. So we thought there must be something behind that. We looked at how these organizations thought about people: how they screened people; retained people; motivated people. We added that into our internal approach. That helped us create a global team able to invest across asset classes and up and down the capital structure. So nowadays, when we recruit, we use our own experience from that build-out process.
PERE: ADIA continues to resist running satellite offices, though. Why?
TA: If you’re in New York, you’re going to know what’s going on in the Americas and if you’re in London, you’re going to know what’s going on in Europe. In our organization, sitting in Abu Dhabi, you’re going to see everything we’re doing globally. You’re going to be able to sit with colleagues from all over the world, all experts in their markets, and discuss things on a global relative value basis. I think there is an ability to develop a little faster and to develop more of a global perspective in that environment, which is an attractive offering.
I actually feel as though we’ve moved to our second phase of internalized management now, and this presents opportunities right under our noses. I remember when I joined we were very reliant on data sourced externally, mostly from brokers. Over time, we realized that we were sitting on a huge amount of information, so we started looking at our own data to see what our own foot traffic was telling us. We’ve now built information systems dedicated to the largest parts of our portfolio. Through our own information, with the information asymmetries in the private markets that we have, we have leveraged that into top-tier performance. I want our organization to be the most informed real estate investor in the world.
“I think the best organizations reevaluate and reinvent themselves on a continual basis. If you don’t do that, you’ll fall behind over time”
PERE: What has your internal number crunching told you about obsolescence in your own portfolio?
TA: If there’s anything that keeps me up at night it is thinking about the trends that will contribute to obsolescence. They can manifest themselves in so many ways. I stood up three to four years ago and said I’m really concerned about retail. I think that’s been proven out.
Eighty-nine percent of all sales in the US still take place in a physical location. But annual online sales are growing 25 percent a year. If you can’t hear those drums coming, then you’ve got a problem. It’s going to have a dramatic disruption. Then there’s the sharing economy and we’re thinking about energy efficiency, too. The way people live is changing, and that’s going to affect the investment environment.
When thinking about operating structures, one of the ideas I like the least is to group teams by sector. It doesn’t reflect the reality of real estate investing anymore. Sectors are merging: there’s less pure office, pure retail and pure residential. Those things are now more mixed-use. People don’t want to be isolated. They want every convenience.
We had an office building with a dominant tenant that occupied 85 percent. We had never managed to completely satisfy them – there was always something they were not happy about. We changed the office manager to someone whose background was as the general manager of hotels. Surprise, surprise: in 90 days, we had a tenant that was happy and everything was working because the person ran the building like a hotel. Hospitality is a part of everything now. I’m just amazed at what tenants will ask for in an office building, but that’s driven by their employees: there is no limit to the services that people would like to access and are starting to expect at their workplace. The days an investor could buy a building and go to the mailbox to look for the check are largely behind us.
PERE: How tenants want to pay for space is also changing. How does this change sit with how investors want to meet their liabilities?
TA: I may be pro-hospitality, but hotels have to lease space all the time. Their tenant base potentially turns over every night. They have to earn their business on a regular basis. I think the co-working industry, as it has emerged, has found a clear need that people will pay for. They’ll pay more for a space with the flexibility that they can buy by the hour, by the day, by the week, in whatever suite of services they want.