Transcript
Can you discuss some of the global thematics you are seeing?
I think the easy one for most people to understand is ageing demographics. One of the areas I think is really interesting right now is senior accommodation or housing, which is typically for people 75-85 years old. We know that cohort is growing very rapidly over the next three to four years. In just two years' time, the first of the baby boomers turns 80, and that's going to be very significant.
We like to call it a silver tsunami of people coming through who are going to need this type of accommodation, be it assisted or unassisted living. The demand story is really interesting but the supply story is equally compelling because this is a sector that got beaten up during covid. It was ground zero for a lot of covid issues and supply has really fallen away. You have a perfect storm of a great demographic tailwind and very limited supply.
The good news about this sector is that it's very economically insensitive. People are getting old no matter what happens to interest rates or no matter what happens to the economy. Every year, they're getting older. So it's a nice little sector to be in anyway, but the demand thematics are very powerful. But the supply story is pretty compelling too.
Where do you see the risks in real estate?
We've generally been very wary of industrial.
When we first launched the strategy nine years old, 20% of our portfolio was in industrial. Most people thought we were crazy. We've done really well out of that over the years, but it's become extremely crowded. It's a very popular trade, and the pricing is just very difficult for us to rationalise. We like to buy the underlying real estate below the cost of build, but that hasn't happened with industrial real estate. Prices are still well above the cost of build. We are seeing continual incremental increases in supply. We're also seeing a normalisation of e-commerce. Amazon has admitted they've got too much supply, and other retailers are starting to manage their inventory levels to lower stock levels.
We think that there's more headwind in areas like industrial.
There are other areas we're wary of. We're wary of countries like Japan where the demographic story is not that great. We don't have anything in Japan or Hong Kong for similar reasons.
We're not in hotels. We think hotels are just capex machines. They require so much capital for upkeep and maintenance. That's less cash flow for us. That doesn't get us terribly excited.
Since we've been taken out of data storage, we just find data storage screens okay for us, but just not as compelling as other sectors.
What is your highest conviction idea in the portfolio?
The highest conviction idea we have today is a senior housing company in the United States called Ventas (NASDAQ: VTR). It's the second largest healthcare real estate owner in the United States. Around half the portfolio is senior housing. We estimate on our numbers that we are buying the underlying real estate senior housing portfolio at 20% to 30% discount to the cost of build.
The cost of build is going up very quickly. It's still going through a post-COVID recovery, so it's probably going to have the strongest earnings growth profile of most global REITs over the next three to four years. You're buying it today at around 15-16x earnings, which is not particularly demanding. The company has 20 year track record, excellent management, and is in a sector we really like with a great thematic.
Storage and retail are the two largest sector allocations in the Quay Global Real Estate Fund (Unhedged). What are the opportunities you see in these spaces?
Well, storage is really interesting, and it's not just any storage. The storage we're most interested in is European self-storage. One of the best performing asset classes in the United States over the last 20 years has been self-storage. Public storage has been a huge outperformer relative to the broader equity market, not just relative to REITs, but relative to tech, relative to REITs, relative to anything. So it's been a great asset class in the US, but now the US has getting to the point it's been quite saturated.
Depending on the data you look at, there's roughly nine square feet of storage in the US per capita. Compare that to Australia, which is way less supplied, around two to three square feet per capita. Australia's in a pretty good position. But if you compare that to Europe, many parts of Europe are less than half a square foot per capita, so supply is really constrained there. There are a couple of players in that market who have scale and have taken advantage of growth in that market. We see that as a real 10-20 year story similar to what the US was 20 years ago. So there are tremendous opportunities. I would say there's opportunities in Australia as well, but the market's bigger in Europe and it's less supply, so it's really exciting.
Retail is more nuanced.
You've really got to pick your horses there. In our view, not every retail stock is going to do well. We've seen shoppers are coming back to bricks and mortar in a post-COVID world globally. I think that the whole novelty of shopping online is starting to wear off a bit, the uncertainty of product, product delivery. Retailers are not as profitable online, so they're coming back to bricks and mortar as well.
You still have to be pretty careful. We think only the best and most productive shopping centres will last. Put another way, the number of stores are going to continue to shrink. But the stores that will remain will be more strategically important, and those stores are going to be located in the high productivity, high footfall shopping centres where pricing power is going to shift back to the landlord. Right now in retail, you can still buy the stocks at pre-COVID prices, which is pretty amazing to us.
