CHRISTIAN CHARLOT: Hello, everybody. Welcome to this segment of Hard Hats and Quick Chats. where we unpack investment topics within the private market world. When it comes to global investing, it's almost like assembling a championship team. Talent exists everywhere, across regions, across markets. The challenge isn't spotting talent. The challenge is making sure which talent makes the roster. And when it comes to global real estate, in a fragmented world, this is the challenge investors face. So today we're going to unpack all the repricing dynamics, the changing opportunity landscape, all of all of that fitting into portfolio construction. And to help us unpack this, we have Andrew Croll, Head of Global Real Estate Investment at TD Asset Management. Andrew, welcome.
ANDREW CROLL: Thanks, Christian.
CHRISTIAN CHARLOT: Andrew, when it comes to repricing dynamics, I know it has changed across different regions. Could you help us shed some light on how this repricing dynamics has changed the opportunity landscape?
ANDREW CROLL: Yeah sure. I think that one thing to keep in mind when thinking about real estate on a global level is that although there are similar drivers of underlying demand and supply, that cycle can be different depending on where you are in the world. And one thing that was very apparent over the last five years is that, if I take the pandemic as an example, the Asia Pacific economies responded very differently than Europe and North America. You know, lockdowns were shorter, and the impact to underlying real estate fundamentals weren't as significant. And so you saw less of a downturn from a repricing standpoint, but importantly, Asia Pacific real estate was actually quite resilient and a very strong diversifier during that period. Now fast forward to the last 24 months, and we've seen significant revaluation in Europe and the U.S. And that creates a very interesting opportunity to deploy capital in these markets more opportunistically, and take advantage of those deviations in market cycles.
CHRISTIAN CHARLOT: If you were going to take a look at capital that you had today in terms of your highest conviction, where would you put that capital?
ANDREW CROLL: I think fundamentally, when you think about real estate, it is all about the yield that drives returns. And with the repricing that we've seen, there are really some tremendous opportunities to capture cash flow and income yield at, really what historically would have been a core plus return with a core risk profile. And so, fundamentally, income drives the underlying performance of real estate. And in today's environment, you know, we're looking for opportunities where the majority of the return can come from income and income growth. One example of that would be on the essential retail side of things where we've been investing in, across Europe, but more specifically in Germany. We recently made an investment last year that was three German grocery-anchored retail, and the majority of the revenue comes from the grocery leases that are in place that have a long average lease term. And those leases grow with inflation over time, And so you have that yield plus that income growth. And we think that this provides a very defensive opportunity for real estate investing today. You know, we're in the high single digit return profile just on the yield or the cash return from these investments, and that's quite attractive. You layer on a little bit of growth and the fact that you're essentially buying some of these assets at a discount to where they've traded historically, and it creates a very interesting environment for for real estate investing.
CHRISTIAN CHARLOT: That's really exciting, Andrew. If you could help capital allocators looking at this to paint the picture, to complete the equation. So we had this repricing dynamics, interesting opportunities across the world. Now how, of that all fit into portfolio construction?
ANDREW CROLL: Yeah, so I think, when we think about portfolio construction, we take both a top-down and a bottom-up lens. From a top-down standpoint, we're thinking about, market research, and really, we create a house view for every market that we invest in, to really try and assess the attractiveness of global real estate, cities, and property types around the world. And that allows us to really put a framework or some guideposts around where we want to invest or where the best opportunities for whether it's economic or demographic growth or really strong underlying real estate fundamentals. But we marry that with bottom-up investment discipline as well and really understanding the real estate and the local market that is surrounding that. And so one interesting example would be the Port of Adelaide distribution centre that we invested in last year, which has a portfolio of industrial warehouses. There's 13 of them, 1.8 million square feet of leasable space, over 93% occupied. What's really interesting from a top-down perspective about this investment is that we have a positive view of the Australian industrial market, and that's a long-term view that we've built out through a number of levers, including some more diversified or specialty investments, and then more recently with that Port of Adelaide distribution centre investment. But from a bottom-up standpoint, there is a you know, $40B shipbuilding industry, less than 10 kilometres away from the site, as well as the home of the nuclear submarine program, that Australia, UK, and US are involved in. It's $368B of investment over the next several decades that is going to create significant supply chain demands for industrial and warehousing space. Over 8 million square feet of new industrial space is expected to be required just to support this program over the next several decades, and we're very well positioned with an asset that is in proximity to this activity, and that ultimately will create strong leasing demand in the future. It will allow us to achieve rental rate growth and keep our asset fully leased. But I think from a starting point, we're already coming into the investment at a very high cash-on-cash yield, which would be, you know, close to 7.5 percent. And so, fundamentally, that will provide the bulk of our return profile, and then there's this long-term structural tailwind will support the investment over its life cycle.
CHRISTIAN CHARLOT: It's really great, Andrew. You know, we live in a fragmented world. So if you take a look at capital allocators, when you take a look at the different regions, which region would you say excites you more, where you see the most opportunities?
ANDREW CROLL: Yeah so, in the last 24 months, we have been more active in making more direct targeted investments in Europe in the multi-let residential, the multi-let industrial, and more essential retail strategies. More recently, we've also been actively looking at and deploying capital in the US market that is also benefiting from that repricing cycle, both in terms of multi-family investments as well as a significant recovery on the west coast of of the US, in markets like San Francisco and San Diego, which are benefiting from the AI boom today.
CHRISTIAN CHARLOT: Awesome. You know, Andrew, that's really exciting. You know, you kind of help us see that opportunities exist everywhere. And in this fragmented world, it's making sure that you're being selective, you have a thorough process to make sure that all fit in, into portfolio construction. So if ever you have any questions regarding the global real estate strategy, please feel free to reach out to your Relationship Manager. This is Christian Charlot from Hard Hats and Quick Chats.
1 Source: MSCI-The Risks of Appraisal Uncertainties in Private Real Estate
2 Source: AI Boom Drives Office Leasing Surge in San Francisco Bay Area
3 Source: Cushman & Wakefield: Decoding APAC Office Demand: Key drivers and trends
4 Source: Macquarie Asset Management: Supporting Brown-to-Green Commercial Office conversions in Europe 2024
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