The fact that Andrew Parsons is on the other side of the world could not be more apparent. The tropical flora of his New South Wales garden dominates his Zoom background as he enjoys the last of the evening sun. This is in stark contrast to the cold and dark February morning that Europe is experiencing.
While Andrew might be thousands of miles away, however, a discussion with him leaves little doubt that he is completely attuned to the latest developments in the European real estate market. “We base ourselves in Sydney, but we invest in the world,” he explains.
Indeed, Andrew is frank about the advantages that being based in Australia can confer upon a globally-minded investor: “Being based here absolutely provides us with a different perspective. We are not on the ground hearing all about the latest deals, but that isn’t our style; we are just trying to invest sensibly in outstanding platforms that have the people on the ground”. This cool-headed and no-nonsense approach has served Andrew and the team at Resolution Capital well. Today, they have EUR 11 billion funds under management. The investment strategy, the Australian explains, is tailored to generate superior risk-adjusted returns by focusing on the quality and level of cash that underlying properties earn.
“What we are trying to do is identify best-in-breed managers with the best people on board,” he continues. “We take the Henry Ford approach; we are not coming up with new strategies and products every five minutes. We keep a focus on excellence in what we are good at. We want to be in a position where we take our time, get it right, and are in an optimal position when it matters.”
At a practical level, this manifests itself in investing in businesses with strong fundamentals in high-barrier property markets where landlords have pricing power. “We want a durable, predictable, reliable strategy,” he points out, which is undoubtedly beneficial in uncertain times.
While Andrew’s approach to investing is global, his outlook has been shaped by his extensive experiences in the Australian market. After starting out in stockbroking after university, real estate was initially an area that was bequeathed upon him rather than one he proactively pursued. Andrew explains that “they see what you are like, to begin with, and give you an area no one wants to cover. They gave me property that wasn’t so popular at the time. In Australia in the 1980s, everyone wanted to cover wine, TV and newspaper stocks, the flashy entrepreneurs and, of course, mining.”
This, it transpires, happened to be a very interesting time to wind up in the Australian real estate sector. The industry, which had gorged itself on generous leverage opportunities, soon found itself in a great deal of difficulty, which led to a crash and freezing of liquidity. Speaking of this, Andrew says that “the unlisted market was in dire straits. The only solution for many was to list and listed ultimately emerged as a powerful force.” This shift towards a listed model provided investors with a strong footing in the market and the opportunity to gain exposure to a much broader range of real estate sectors.
Andrew and his team’s investments in Australian REITs proved sound, and after establishing themselves as a leader in the domestic market, they decided to expand globally. Much of this, he explains, was driven by a broader appetite from Australian investors – who had previously been quite inward-looking – to take advantage of international opportunities.
In 2004, Andrew and his team left Lendlease to develop a new offering. According to the Chief Investment Officer, people didn’t want something that resembled an index anymore; they wanted a concentrated portfolio. “At the time, most people in real estate were benchmark huggers, and we wanted to make ourselves stand out,” he says. “To start with, we averaged less than 50 stocks and went with a multi-portfolio manager approach. It wasn’t necessarily a new approach in general equities, but it was novel to REITs.”
Resolution Capital has continued to both grow and innovate since its genesis. Andrew explains that the firm launched a new ETF in February, which is a result of growing client demands for straightforward and efficient ways to access global real estate markets. He emphasises that this is continued evolution rather than revolution, however, and simply augmenting what the firm already does.
When talking about issues that investors should pay attention to this year, Andrew is clear that rising inflation and interest rates should be at the top of the list. According to the Australian investor, these challenges will be more significant because of previous monetary policy. “We are going to live with side effects of past economic and monetary policies for some time,” he says. “The quantitative easing experiment distorted markets and interest rates, which together with the response to the pandemic, means there will be both long-term consequences and unforeseen secondary effect.”
This will have repercussions for businesses in the real estate sector. He explains that “we don’t pretend that we know how things will play out. However, one thing that is apparent is that these changing conditions could catch over-leveraged businesses out; many have acted like they are infallible, and the level of complacency over this has been unacceptable.”
Resolution Capital will avoid investments in such businesses this year. According to Andrew, their focus will be on offering their investors access to brands like Big Yellow and Derwent London – both of whom he identifies as having appropriate leverage and discipline management.
While there are many causes for optimism in listed real estate markets this year, changing economic conditions are creating different challenges that the industry and investors have not had to navigate for some time. Andrew and the team at Resolution Capital’s diligent and fundamentals-driven approach should serve them well, however, no matter where they are in the world.