Commercial property as an asset class has features and benefits that aligns well with the long term investment needs of charities – sustainable income yields and expected capital gains ahead of inflation. But the asset class has been through a soft patch the past 18 months. In this the second Outlook profile in our series, we turn the spotlight to Garry Anderson, Trust Management’s Head of Property. Garry leads a team of nine property specialists who manage assets of the Trust Management Property Fund. Alongside other portfolios, the Team oversees property investments worth circa $1.5 billion represented by over 100 properties across the country.
Recognising the fund’s performance, the Institute of Finance New Zealand (INFINZ) selected Trust Management (specifically, the Balanced Fund, which has a high exposure to the Property Fund) as a finalist for the 2023 Award.
We asked Garry for some further insight into the Property Fund, and most of all, are we there yet?
Q: How has the property market changed over the past 10-15 years particularly as it relates to risk?
GA: “Certainly the market has changed, but fundamental questions haven’t. Which sectors and the degree of exposure to those sectors is right for our clients? Our strategy anchors to sector weightings for specialist retail, high street retail, bulk retail, and industrial – think warehousing and manufacturing. More recently we’ve increased weightings in favour of industrial properties – and we’ve done very well for our clients, who generally are risk averse. We further diversify risk by investing in buildings in distinct locations. A charity with a single building faces much higher risks because they’re dealing with a single building – there is no means to diversify across location, sector, or tenant. Investing in a property fund fixes that.”
Q: What are some of the more recent changes that influence your investment strategy?
GA: “We lean heavily on market research. Current trends include the rise of hybrid working, which has altered demand for certain types of office space. Web sales and drop shipping have increased demand for warehouses, whereas high-street and specialist retail is suffering. So, we have a lower exposure to specialist retail and more exposure to bulk retail and warehousing – which also means the Trust Management Property Fund fund has a lower level of Green House Gas (GHG) emissions than other comparable funds, principally because the properties we invest in are used for storage rather than production or manufacturing, resulting in a lower carbon footprint. The Property Management Fund is Toitū Envirocare certified and zero-carbon certified. Broader ESG considerations, including factors that make buildings good places to work and present fewer risks to occupiers and visitors, are other factors steering our investment strategy.”
Q: Why does the Trust Management Property Fund appeal to charitable investors?
GA: “Portfolio investment entity (PIE) funds offer investors the benefit of a diversified portfolio of assets without holding those assets directly. One of the big advantages is the lower tax rate – investors pay tax on the investment income at their prescribed tax rate. Of course, most registered charities in New Zealand are tax exempt. The important characteristic of a property fund is quarterly distributions. Rents are paid monthly, which means there are funds available for distribution. Most of the charities we act for want to protect and grow their capital but rely on distributions for cashflow. A property fund works well on both fronts. The other thing to consider is that some investors look to listed property firms to get their exposure to property. However, they’re investing in equities – so the value of their property investment is subject to the dynamics of equity markets rather than reflecting the underlying value of property assets. Equities can swing above and below their asset backing whereas a property fund trades at a unit price based on asset backing (property value less liabilities divided by unit holders). A property fund is a much better bet for the long-term investor.”
Q: What makes property investment such a solid performer?
GA: “Consider a conventional business, which in a typical scenario will have a time-stamped contract to deliver a certain number of widgets. In property, you deal in weighted average lease terms – that is the number of years of income on average under the terms of the contract. The average lease term for properties in our fund is over five years, which offers a high level of security for investors. Few if any other businesses have that level of contracted income into the future. Property is also one of the few asset classes that acts as a hedge against inflation. If the building replacement cost rises off the back of inflation, then when a tenant asks a landlord to build a property, both parties understand that the rent will increase to reflect higher building costs. The other unique feature of property is that everyone has an opinion on property. That can be a challenge, but also a strength in that it’s easy for clients to understand what they’ve invested in. Everyone is familiar with a supermarket, for example.”
Q: Trust Management’s Property Fund is arguably conservative in nature but has delivered returns that are comparable to more aggressive property funds. What are you doing differently?
GA: “We have done well to deliver long term performance above the S&P/NZX listed property sector index. And particularly so given that we don’t do property development or take on debt for leverage purposes. Our success comes down to several things, chief among them the depth of our team. We offer an extraordinary level of experience and expertise. Our processes are also extremely robust and include prepurchase reviews to determine a tenant’s credibility, risk profile and good corporate citizenry. This is why we gravitate to publicly listed company tenants, because they operate more transparently and with more stringent governance. It’s much harder to run the ruler across an unlisted company, though we can still see the makeup of their board and scan social media to gauge labour issues or other injustices. We just want to ensure our clients are investing in good corporate citizens. When you’ve been in this business as long as we have, you get an appreciation for the type assets in your portfolio. Investors should take a hard look at their property fund providers and ask: what’s your story? Why are you exposed to those assets in those locations? We have a very solid story based on weightings.”
Q. What about the current Property cycle? The asset class has been through a soft patch of late. What do you see as the outlook from here?
GA: All asset classes have long term cycles, and property is no exception. Property markets are influenced by economic conditions, interest rates, and demographic trends. The recent rise in interest rates as central banks tried to curb inflation has been a drag on valuations and earnings for the sector, especially for the listed and geared funds. We have no debt for leverage, which is a point of difference for us. Inflation is actually a positive factor for property, as it increases the replacement cost of assets and the rental income from CPI or market linked leases.
From here, we expect that yields will stay near present levels during 2024 and into 2025, and then strengthen slightly as economic circumstances and market confidence improve and the forecast cuts in interest rates take effect. We are very optimistic about the outlook from here.
You can contact Garry on +64 21 546 700 or email: ganderson@trustmanagement.co.nz
ABOUT TRUST MANAGEMENT:
Trust Management is a registered charity providing full-service property and investment management services, advisory services, and a range of accounting and governance services to the charitable and for-purpose sector.
Trust Investments Management Limited is the manager and issuer of the Trust Management PIE Funds Scheme, which comprises six PIE funds, including an unlisted property fund. A copy of the Scheme’s Product Disclosure Statement is available from www.trustmanagement.co.nz/investorresources
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