Investing across different property sectors
GIC’s real estate assets span multiple property sectors, including office, retail, residential, industrial and hospitality.
“The fundamentals look fantastic, but increasingly industrial is being priced at a premium,” adds Gallistel. “Having said that, it is also one of the most liquid parts of the market so, from a practical perspective, if you are a large investor, you don’t really have a choice but to be active in the sector. If you are running a smaller opportunistic fund you can go hunting where the real alpha opportunities are, but shunning valuations in the largest and most liquid sectors in real estate is just not feasible for a large institutional investor.”
“While we are clear eyed on the headwinds in both retail and office, we see pockets of opportunity relative to many institutional investors.” says Gallistel. “In the US, we have never owned many malls so that leaves us unburdened. We are not licking the wounds of the past and can approach the sector as a potential opportunity. Retailers recognise that they need some sort of omni-channel distribution. At some point, investors must realise that e-commerce companies eventually have to make money, and we believe that a physical footprint will be an integral part of most profitable retailers’ businesses. Is that physical footprint going to look like the mall of the eighties? Probably not. Is the US fundamentally over-retailed across strip and big box? Yes. I think it is going to be a painful winding down process, but I do think there are areas within retail that will prove resilient.”
Office, on the other hand, is a sector that is just too big to ignore, according to Gallistel. “It is the largest investable institutional real estate class. We do not buy into the narrative that office is going the way of retail,” he says. “Office already had problems pre-Covid in that it was a low cap rate, capex intensive sector, with a business model that carries cash flow volatility and operational risk when it comes to rolling leases, so I have never really understood why it was considered the most core of core real estate. Nonetheless, we don’t believe the apocalypse is nigh. I think there are gems to be picked up and it could be a good time to be hunting in this space.”
GIC has been investing in alternative property sectors for over a decade. “If I look back at what led us into the niche sectors, it was our knowledge of public markets, where these sectors were already well-represented, coupled with concerns about valuations and/or fundamentals in the traditional institutional asset classes,” says Gallistel. “We saw these alternative sectors where there was readily available information, and which were trading at higher yields. Financing cost and availability looked as good as or better than traditional real estate, while lower capital intensity could lead to better free cash flow conversion. By definition, that means more dividends to put in your pocket. I always think dividends are the best hedge against inevitable mark to market. Fast forward today, all of that is still true, with the exception of the higher yields. Alternatives still represent a good bet relative to traditional real estate. It’s just not the same obvious choice it was a few years ago.”
“In terms of development, I used to think we were not well-compensated for taking development risk, particularly in the US where it is hard to argue that we are undersupplied in anything,” says Gallistel. “But there is a place in our portfolio for development because, as it turns out, people like new buildings and if we can deliver new buildings that aren’t at the top of market, that’s quite compelling as they can capture more than their fair share of demand.”