When Corrado Russo thinks about real estate, his mind tends to wander to the other side of the world.
While buildings are trading at a premium in countries such as Australia and New Zealand, Mr. Russo said the public companies that own those buildings are still trading at a discount as investors shy away from real estate companies that were hammered through the recession.
“Australians did a lot of international investing through the bull market and did a lot of financial engineering to get exposure to Europe and the U.S.,” he said. “And that led to a sell-off in the retail market on the way down. They’ve cleaned the international issues on their balance sheets, but they’re still in the penalty box. Because of that, you’re still finding those high yields.
As the manager of the Timbercreek Global Real Estate Fund, which just raised $100-million to invest around the world, it’s Mr. Russo’s job to find those deals. The fund’s managers only get paid if the fund is making money. They get 1.25 per cent of net asset value per year if their returns are up to 7.99 per cent, 1.5 per cent if returns are up to 11.99 per cent and 1.8 per cent if the total returns are in excess of 12 per cent.
He recently answered some questions about his fund.
What’s the message you delivered when raising money?
Our objective here is to deliver a 7 per cent yield. This is not about delivering 40 per cent returns by buying Chinese homebuilders and Japanese condo developers. This is about buying full buildings and companies that own bricks and mortar, collect rent every month and then pay that rent to us so we can distribute it to our clients.
Why does the world need another real estate fund?
There is a lot of demand for yield product. Pension funds have bought a lot of the quality properties in Canada, but outside the country there is still the ability to buy assets through the public entities that own them. Given what’s happened during the financial crisis, many companies are trading at significant discounts. That actually allows you to buy good quality real estate without sacrificing yield.
That opportunity won’t be there forever – the companies we are buying are trading at about a 20 per cent discount to net asset values. My guess is that goes away in three or four years. It’s already starting – pension funds are going global. Australians are going outside their borders, the U.S. funds are too. As they compete, they will put prices up.
Why are there such inefficiencies in pricing?
Real estate is still a relatively under-followed industry, and it’s a relatively infant market in places like New Zealand or Singapore. In those countries, you see yields in the 10 per cent range versus Hong Kong or London in the 5 per cent range. Most investments are still driven by domestic investors, you haven’t had global investors come in a big way to remove those inefficiencies.
How do you plan to split your investments?
All of the [directly owned properties] will be in Canada, so that’s about 20 per cent. There will be very little equity bought in Canada, because there are better opportunities elsewhere.
You have to blend which parts of the world you like, with what you’re buying in those markets. If we look at common equity, there are tremendous opportunities in New Zealand and Australia. You’re getting great quality assets at a 9 per cent yield. The actual real estate is trading at much higher valuations, but the companies are still being discounted.
In the U.S., I think common equity is expensive. REITs are yielding around 3.5 per cent, because they are pricing in growth – Americans are forever optimists. But in the preferred market the yields are still 8.5 per cent. It’s a huge inefficiency in pricing. Historically, yields for both those sectors have been around 6 per cent.
In Canada, the best risk-return trade-off today is in direct investments in multi-family housing.
How do you go about finding a great REIT?
You need feet on the street – I have analysts on the ground in New York, London and Hong Kong. All they do is go and visit properties and management teams. We don’t have to wait for a property to come up for sale and decide if we want to buy it. We can go into Sydney, for example, and decide to be on the coast and then figure out if we want to buy equity directly or structure a private placement.
How active a manager can you be in a fund like this?
A lot of the active management comes in finding these deals around the world. Once we buy, we will hold them because we are buying for the long-term. We’re buying for the yield. But if things get overvalued, we will sell. A lot of European and Asian equities had a good run up by the end of last year, so we were selling out of those and going overweight in the U.S. preferred market.