Investors should now be focused on defensive strategies within their property portfolios as the overall real estate market environment may be primed for correction, says Man Global Private Markets (Man GPM).
Man GPM, launched in 2017, is the private markets business of global active investment management firm Man Group. Man GPM focuses on assets within private markets, with a remit that includes direct real estate, real estate debt and corporate credit with the intention to add complementary asset classes over time. In January this year, Man Group acquired Aalto Invest, a US and Europe-based real asset focused investment manager, which forms the real assets business of Man GPM, Man GPM Aalto (Aalto).
Mikko Syrjänen, Co-Head of Real Assets at Man GPM and one of the founders of Aalto Invest, visited Australia recently to meet with local institutional investors and outlined differences between Australia and the US in direct property markets. He has warned investors to tread carefully in the current market cycle and suggested using defensive strategies to weather any potential property downturn.
“We have seen an increasing number of large institutional managers showing a desire to include more unconventional and often illiquid assets within their portfolios. Real estate, both equity and debt, has been a beneficiary of this move.
“However, there are too many people being too blasé about the space. By our estimation, we are now around eight years into a US real estate bull market that has seen prices in some areas, such as US commercial real estate, rising 39% above their previous record peaks1. Although no-one knows the timing of the next downward correction in real estate, it seems likely to us that we are now past the halfway point at the very least.
“We believe that this environment warrants a far more cautious and selective approach to real estate markets. It is essential to build real estate allocations around long term fundamentals, rather than short time euphoria, and in doing so we think that the space can still represent a vital part of most institutional mandates.” Mr Syrjänen said.
The next evolution in real estate investing
Aalto has favoured the US single family residential (“SFR”) sector since 2012, seeking to offer investors long-term, stable and diversified income with low price volatility relative to the wider market.
“While the real estate markets overall, both in Europe and the US, are at or above the last cycle’s peak in terms of overall valuation, there is a significant dispersion of valuations within these markets. For example, the 20-City Case Shiller U.S. National Home Price Index is still well below the previous peak in July 2006.”
“The SFR sector is also considerably larger than the US office, multi-family or retail real estate markets with a market value of USD 2.9tn across 15.7 million units2.”
Hersh Gandhi, Managing Director for Asia Pacific at Man Group, said that while the SFR sector was new to many local institutional investors, it presented a growing, dynamic market that provided numerous potential opportunities for Australian investors.
“There are important structural differences that exist between offshore property markets and the Australian market – in terms of size, opportunities and valuations,” Mr Gandhi said.
“Although most markets performed well leading up to the GFC, fortunes have diverged markedly since then. This is especially the case with direct property markets in the US.
“Since institutional operators like Aalto began investing in SFR in 2012, the market has grown to be seen as its own real estate investing segment. We think that this trend of institutionalisation has a lot further to run and the sector will become an even more attractive place to invest.”
The acquisition of Aalto Invest and launch of Man GPM are a step further in the evolution of Man Group, complementing the firm’s historical offering in liquid strategies.
“Aalto brings a specialised, high calibre and extremely entrepreneurial team to Man Group. It broadens and further diversifies our investment management capabilities, giving clients access to a range of differentiated real asset offerings that suit clients seeking stable, long-term income,” Mr Gandhi said.
