NZ Super Fund, the NZ$28 billion ($19 billion; €17 billion) superannuation, began to reduce its private real estate exposure through the secondaries market last year. A year ago, NZ Super held about 5 percent of its portfolio, in unlisted real estate, a percentage that has now fallen to around 0.4 percent of the portfolio. Secondaries Investor spoke to Nigel Gormly, head of international direct investment at the pension fund on its wider secondaries strategy and why it is getting out of unlisted property.
Why are you reducing your exposure to unlisted real estate investments?
You can get exposure to real estate markets very cheaply and efficiently through REITs (real estate investment trusts). With all of our investment opportunities we’re always looking and asking how we can leverage our endowments to add value over and above our simple low-cost passive portfolio.
In any investment decision we make when we buy an active investment, we’re effectively selling the risk-equivalent passive investment. So, we need to be earning a better risk-adjusted return in what we buy than what we sell in order to add value to the portfolio.
Is the current sell-down of your unlisted real estate assets the first time you have tapped the secondaries market as a seller?
No. Secondaries are a minor part of what we do but we’re always looking and asking where the opportunities are that are attractive.
How does the secondaries market fit in with your overall portfolio strategy?
The secondaries market is one way we can redeploy capital into more attractive opportunities to achieve a better risk-adjusted return. We can also use it to buy fund stakes when they are materially undervalued and we have historically both bought and sold secondary fund stakes.
We don’t have a dedicated team but our unlisted mandates team has the relevant expertise and we are able to seek external advice if required.
How do you judge private active investment through funds against passive listed exposure in an asset class like real estate?
In the real estate space you’re always looking and asking, does the active investment offer an ability for us to leverage our endowments or is there some sort of structural or market inefficiency that’s leading to more attractive risk-adjusted returns than what you can get in the passive sense.
We’re always judging to see if the price of any of our investments is approaching long-term value, then we always ask, are we the natural owner of this asset or is it better to divest it?
Will you return to the unlisted property sector?
There will be situations, over time, where the private real estate market is more attractive than listed and will justify direct investment. There may also be situations where individual investments will want us, or investors like us, specifically because we may be able to assist the business to unlock value.
Speaking very generally though, if an efficient real estate private market is going to offer, on a risk-adjusted return basis once you consider illiquidity, a potentially similar return, then our default position is always going to be to keep it simple and keep it in a low-cost passive exposure.