John Hawinkels and Marcus Erlank, Catalyst Fund Managers
The evolution of listed property
Global listed real estate has evolved significantly over the last two decades. The traditional sectors of real estate including offices, industrial and retail have shrunk in size as new and unique sub-sectors have gained institutional acceptance.
The advantage of having new real estate sub-sectors is that active fund managers have more options to invest long and short, depending on where the opportunity lies.
Macro and fundamental trends
The industrial sector is currently going through a structural shift as warehouses are being highly automated and the need for urban logistics presents itself as online penetration increases. For tenants, logistics is about 5% of the overall supply chain cost, with other costs like transport and labour being much higher. Tenants are willing to pay higher rent for better space that helps them create efficiencies throughout the rest of the supply chain.
Self storage is a notoriously a good hedge against the market cycle. Whether an individual is upgrading or downgrading their housing, self storage is needed. In or out migration like we had during COVID is positive for self storage. The revenue profile is exceptionally sticky too, meaning that the average tenant will happily pay inflation plus increases than go through the rigmarole of having to change from one storage provider to another to save a few dollars per month.
Offices are experiencing a structural headwind as work from home grips the globe. A lot of longer term leases that were struck pre-COVID still need to roll off and re-price and, as a result, the full effect of the lower demand for offices hasn’t yet been felt. A-grade offices are mopping up what’s left of the demand, as employees demand more amenities from their work spaces, while B-grade offices are becoming all but obsolete.
While positioning across sub-sectors is important, focusing on geographical macro trends is also important. Across the globe, rising interest rates and rising inflation are at the forefront of all conversations. While most regions are feeling the effects thereof, the US may well be better positioned to ride the storm than Europe, which is experiencing record energy price inflation as it goes into winter.
Listed real estate in a high inflation environment
Listed real estate can be a good hedge against inflation in the medium to long term. Theoretically, an investor should be able to get the benefit of higher inflation if the listed real estate company has strong tenants that can absorb an inflationary increase to their rents and market rents track or exceed inflation. Obviously due to operating leverage, this only works if the company is able to appropriately keep their operating costs, administrative costs and debt costs under control.
Real estate versus bonds
REITs have to pay out materially all their distributable income to get the tax benefits of having “REIT” status. This means that in the short term, listed real estate can have some correlation to bonds. Over longer time periods, however, the correlation to bonds is very low and can provide a differentiated return profile. New subsectors within the listed real estate universe can also provide equity-like returns due to the high growth nature of their earnings profile.
Through active management, however, fund managers can achieve a low correlation to both listed real estate and general equities.
A global listed property hedge fund and Reg 28
From January 1, 2023, the Reg 28 limits are changing to allow up to 45% offshore investment (up from 30%) in pension funds. Along with this change, the allocation to alternative asset classes of private equity and hedge funds is increasing to 15% and 10%, respectively. This is up from a combined 10% in these asset classes.
The low correlation of real estate with most other asset classes makes global listed property a differentiated diversification opportunity for retirement funds. A flexible global hedge fund represents an even lower correlation – both to the general property market and to other asset classes.
The Catalyst Alpha Global Hedge Fund is domiciled in Ireland and USD denominated but managed from South Africa.
High-conviction, adjustable exposure
A long biased, long/short equity strategy focused on listed developed-market real estate is able to take long positions in good value companies with sound fundamentals, solid balance sheets and competent management teams and short those companies that don’t meet these criteria. The fund will adjust exposure to the market based on the value seen in the constituents within the developed listed real estate universe.
The Catalyst Alpha Global Hedge Fund was launched in late 2015 with a mandate to deliver the best absolute risk-adjusted returns while investing in listed developed market real estate. With the long track record of the Catalyst Global UCITs fund (launched in 2007), the founder of Catalyst Fund Managers and portfolio manager of the global hedge fund, Andre Stadler, desired a fund that could deliver returns without being benchmark or tracking error constrained.
From time to time, the fund will take positions in bonds and derivatives if the investments aim to enhance alpha or lower volatility. The fund’s benchmark is three-month US Libor + 3%, with an imminent migration to three-month SOFR + 3%. It aims to achieve a net annual return after fees of approximately 7-8% in USD while limiting volatility over longer time periods.
Global investable universe
The investable universe for global developed market real estate comprises constituents of the FTSE EPRA NAREIT Developed Rental Index. This includes listed real estate stocks in geographic regions including the US, Canada, Europe including the UK, Australia, Singapore, Hong Kong and Japan.
The total constituents exceed 300 stocks.
At Catalyst Fund Managers, our investment team does primary research on approximately 120 stocks, as well as some off-benchmark opportunities. The fund invests in 15 different sub-sectors including self storage, data centres, towers, manufactured housing and single family housing.
A global investment mandate requires a strong team and research capability. Backing a team with specialised real estate expertise and experience enables access to the top opportunities and management capabilities.
The Catalyst Fund Managers Alternative Investments team has been bolstered by two additional employees. Jamie Boyes has managed the global UCITS fund for 15 years and takes over the day to day portfolio management responsibilities of the global hedge fund. John Hawinkels joined the team at the beginning of 2022 as a senior analyst in the global space. Both these employees bring a wealth of knowledge and expertise to the team and ensure the continuity of knowledge.
Why invest in listed real estate?
- High income yield: Because the income investors receive is secured against a contracted pool of leases, the income stream on real estate investments is relatively predictable.
- Reduced volatility: Real estate earnings generally have a lower volatility versus general equity earnings due to the contractual nature of the underlying leases.
- Diversification: Real estate performance has a low correlation with other asset classes. Including the asset class in a multi-asset class portfolio can therefore deliver better returns at the same level of risk.
- Potential for long-term capital growth: Capital growth is a function of income growth. Over the long term, the value of real estate appreciates, which enhances the income stream.
- Access to larger assets without assuming the full investment: Investors can access a broad range of geographical, building and tenant profiles through fewer investments.
- Lower costs and flexibility: Lower transaction costs and enhanced liquidity mean investment managers have more flexibility in making decisions about allocation and can select the company they wish to invest in. The costs and effort of managing real estate investments are also lower than acquiring and managing physical properties. Copyright. HedgeNews Africa – October 2022.
Jamie Boyes, John Hawinkels and Marcus Erlank are part of the team at Catalyst Fund Managers Alternative Investments, focusing on listed local and global real estate.