Super funds follow ADIA into new real estate sector

Contributor – Sarah Jones

Australian asset owners are only just starting to invest in a new sub sector of real estate that some of the world’s largest institutional investors including Abu Dhabi Investment Authority (ADIA), Oxford Properties and Singapore’s GIC have already allocated capital to.

Jonathan Hannam, co-founder of investment firm Taronga Group, said institutional demand for real estate technology, known as realtech, had “exploded” over the past 12 months as real estate owners and investors look to future proof their portfolios and make them more efficient. He added that 80 per cent of the cost of a building over its entire lifecycle occurred after it was constructed.

“It’s been talked about as a new asset class,” said Hannam in an interview. “Real estate technology is the next wave of property investment. Institutional capital is demanding that the industry be more tech savvy because it can lead to greater efficiency and higher returns.”

Venture capital investment in realtech has grown 14 times over the past five years to US$25.6 billion in 2020, according to research firm CRETech. Hannam told delegates at Investment Magazine’s Real Estate Conference recently that major global investors including ADIA, Oxford Properties (the real estate investment arm of Canadian pension fund OMERS) as well as firms like Brookfield Asset Management had allocated capital to realtech via their property investment teams.

Still, Hannam said the surge in venture capital was mainly coming from the Asia pacific region, which accounts for 60 percent of the total realtech assets globally.

In Australia, superannuation funds are just beginning to invest because up until now, portfolios were being buoyed by a strong property market. Hannam said that in order to maintain strong returns, asset owners needed to invest in technology and innovation to drive greater efficiency.

“It’s starting in Australia but it’s been slow,” the fund manager said. “Institutional investors are just starting to question their real estate manager’s strategy to protect the underlying portfolio. They are looking to future proof their assets.”

He added that investors like Dexus, ISPT, Lendlease, Australian Unity and PGIM had all taken their first steps into the sector and were actively working with emerging technology companies.

Hannam said his firm sought a minimum 25 per cent internal rate of return (IRR) for new investments. This compares to the current market, where core real estate returns range from 5 to 9 percent net IRR, value add returns range from 10 to 14 per cent and development returns range from 15 to 18 per cent.

“The amount of capital chasing the real estate tech sector is growing rapidly,” he said. “We’ve seen this incredible surge of institutional investment coming into the space… including Asian and Middle Eastern sovereign wealth funds, Canadian and Dutch pension funds as well as Australian superannuation funds.”

Originally published by Investment Magazine on the 15th March 2020 – Contributor Sarah Jones