As funds management continues to evolve – the unlisted space both bifurcating and merging with the listed space, for instance, in the alternatives world, if that’s not a contradiction in terms – big investors need to pay attention. Change is afoot. Take a look at real estate-backed private debt.
Heitman, which is an independently owned Chicago-based global firm specialising in private debt across a handful of strategies, recently set up an Australian office, in Melbourne, run by Beau Titchkosky. The interesting theme for Heitman in Australia and New Zealand is that the firm’s strategies and funds marry the benefits of private debt and real estate.
Visiting Australia last week, Mary Ludgin, a partner and the global head of research for the firm, said the big advantage of focusing on the real estate backing of private debt investments was that Heitman could share the investment information across each market segment, such as: REITs, debt and equity.
“Real estate, in one form or another, is all we do,” she said. “We share the investment information [with the portfolio managers and analysts]across all the market segments.”
Ludgin actually has some Australian connections, as does her Chicago-based colleague James Gruver, the global head of sales and client service. In the 1960s, Ludgin’s uncle came to Australia to live, followed, more recently, by her sister and her sister’s husband. Gruver, in turn, is well known for having run BNY Mellon from Sydney for several years, and having children who are Australian citizens (they are probably dual citizens, but don’t tell the High Court).
Although its investment strategies are usually classified as private debt, Heitman sees itself as a real estate specialist firm. It four major asset sub-classes in which it has a lot of knowledge, are:
- Rented residential apartments, which the Americans call ‘multi-family dwellings”
- Office buildings in first and second-tier cities. Second –tier cities are producing the best results recently
- Industrial – such as warehouse developments – and logistics properties, and
- Retail properties. This is a controversial area given the encroachment of the internet giants, such as Amazon, in the market segment.
In terms of its favourite sub-markets for the short-medium term, Ludgin says, Heitman particularly likes student housing, aged care, medical office-style buildings and self-storage facilities.
She says: “Retail is the topic of the day. As an historian [in her initial career]I can see that disruption is nothing new. Both in the US and in Australia, retail is being disrupted. But the strongest centres are those which will be the strongest throughout the changes.”
What she means is that those shops and shopping centres which are strongest because of some certain attribute, such as ultra-high quality or bespoke offerings, will likely survive or even thrive. “Mediocre” retail will die… Many US cities are actually two cities. There is a thriving downtown, with new apartments, and even with ‘air rights being paid above them’… but real estate elsewhere is not doing well,” she says.
She believes that Amazon’s entry into the physical retail market, in both the US and coming up in Australia, represents both a risk and an opportunity.
She says: “With [Amazon’s] purchase of Whole Foods, it suggests that the model is too expensive to be executed only online. There is a value to a brand and a value to having a physical place. Other pure-play internet retailers, such as sunglass online, have opened stores. The business model involving free shipping and free returns is complex. It is actually an upsell opportunity. But upselling instore is successful but not so much online… There is a lot of change coming, but it’s not because of Amazon.”