The New Zealand Superannuation Fund (NZ Super), a sovereign wealth fund (SWF) with NZ$60 billion ($40.5 billion) in assets under management (AUM), is in the process of increasing its exposure to property in Asia Pacific (Apac) — with major deals set to be announced early in 2022.
“We have several interesting opportunities in the region we are working on,” Toby Selman, who is in charge of property investment strategy at the fund, told AsianInvestor, adding that the fund will likely announce details by March.
Selman said that Apac is a particular focus for the fund, due to its favourable demographics and market dynamics. The fund favours developed Asia — namely China, Japan, Korea, and Australia — because of the markets’ greater liquidity, but it is also keeping an eye on Southeast Asia.
Last year, NZ Super invested $150 million to the latest regional fund in CBRE Global Investors’ Asia Value Partners fund series, which focuses on logistics property developments across Japan, South Korea, and China.
NZ Super prefers club deals or small Limited Partner (LP) group funds with fund managers. “We prefer to invest with a small number of investors. If there are only three or four of us, we have a meaningful voice on governance and important areas such as sustainability, and can push our net zero goals,” Selman said, adding that the fund had close relationships with other peer sovereign funds, including those in Singapore and Australia. “We actively talk about opportunities and market views so we have good alignment.”
Selman said he liked the fundamental supply-demand dynamics for Apac, and pointed to the relatively low institutional capital allocations compared to the US or Europe, as well as the lower relative supply of prime buildings.
He also stressed the region’s favourable demographics, technology adoption, and opportunities to help achieve NZ Super’s sustainability goals, which include reducing the emissions intensity of the fund by 40% and its carbon reserves by 80% from baseline levels by 2025.
Sustainability considerations play a big role in selecting data centre opportunities in Asia in particular, he said. “A big thing we think about is power: its cost and sustainability,” he said, noting that solar or geothermal power sources are valuable ways to reduce a data centre’s carbon footprint.
NZ Super’s domestic investments include a Future Urban Land platform, a NZ$250 million investment comprising large land holdings that will be rezoned. “This is future mixed-use development in communities that are sustainable and have a positive impact,” Selman said, pointing to affordable and build-to-rent housing as two features.
Selman established a new global investment strategy earlier this year for its property investments, focused primarily around living, logistics, and technology-oriented real estate in sustainable cities with attractive market fundamentals.
“Essentially, we are creating a new-economy real estate portfolio,” said Selman. Selman, together with Sian Orr, portfolio manager for real estate managed international funds; and Katie Dean, portfolio manager in direct investments; lead the execution of the strategy.
The fund’s technology focus includes data centres, life sciences in the form of lab buildings, and film studios. “We like those alternative sectors with growth occupiers in technology sectors,” Selman said. He pointed to the increasing trend of more operating-type leases, such as those in the hotel sector where owners often take a percentage of an operator’s profits (the fund owns a hotel platform in New Zealand); and data centres, where leases can be either long duration or a hybrid.
NZ Super favours specialist property managers in specific regions. Besides the CBRE investment, the fund has invested an initial €225 million ($255 million) in a European grocery-anchored real estate platform with Slate Asset Management; and €150 million to a fund with Deutsche Finance International (DFI), a European private equity real estate manager focused on future workspace, lifestyle, and hospitality investments.
“While the retail sector has been heavily impacted by Covid-19, we have been selectively targeting grocery and essential services-based real estate in Europe, where we see an attractive combination of pricing arbitrage and longer-term value in aggregating grocery-led logistics nodes in suburban locations across continental Europe,” said Selman.
The fund is more growth-oriented than many of its peers, since its substantive liabilities to the New Zealand government will not be due for another 30 years.
The fund exists to help smooth the future cost of universal superannuation in New Zealand: no withdrawals are scheduled before 2035, and there are unlikely to be substantial outflows until 2050 at the earliest.
The fund’s first government contribution of NZ$2.4 billion came in 2003, after which additional contributions have brought the total to NZ$20 billion. Thanks in part to investment gains, the fund was worth $30 billion in 2016 and is worth $60 billion today.