Alecta’s head of real assets Axel Brändström took the helm a year ago. Charged with building out the real estate allocation in one of the most tumultuous years for the asset class on record, his eye is on e-commerce opportunities and allocations to assets not linked to GDP.
Scratch beneath the destruction of value across office, high street, hotel and leisure, and new opportunities in real estate are beginning to emerge. Logistics offering solutions to last mile e-commerce delivery and assets that aren’t linked to GDP like medical centres and care homes are front of mind for SEK1007 billion ($120 billion) Swedish pension fund Alecta, hunting for properties to fill a growing allocation to real assets that targets a 4 per cent return, undaunted by the pandemic’s trail of destruction.
“We are on a journey to increase exposure that has resilience and diversification at its heart,” says Axel Brändström, who left his role as CIO of Skandia Investment Management a year ago to head up the real assets allocation. “As with all things, we have a long-term strategy and we are on our way to reaching our target in terms of asset allocation. As usual, it will depend on markets and valuation. I am quite confident we will get there.” The real estate allocation will account for around 15 per cent of an expanded 20 per cent allocation to real assets that includes infrastructure (3 per cent) and alternative credit (2 per cent)
New investment opportunities are beginning to emerge in office despite everyone working from home and companies, sharply aware of these new corporate efficiencies, showing no signs of returning en-masse.
Expect tiers in the market to become more pronounced where office space in bad locations will be punished harder, predicts Brändström.
He also believes that companies will seek to keep staff working mostly from home going forward, but also want office space to gather, and that existing offices will need reconfiguring to meet employee’ demand for more space.
“The use of office space will be different and there might be a smaller requirement,” he says.
Although it’s too early to make a bet on what this means for investors, he advises close contact with tenants so as to be across their changing needs. He also predicts a jump in demand for hubs and co-working facilities, as well as new trends in large companies opening satellite offices to allow employees to have shorter commutes but still work in an office.
“These kinds of structures will increase,” he says.
He also sees opportunities in beleaguered retail where he expects strained cash flows in the sector to increasingly turn into insolvencies: Alecta’s strategy is flexible and pragmatic, he says.
“We want to invest capital, and this will create opportunities for us to go in and support viable businesses,” he explains. “This goes for retail and most stressed segments, but of course it’s dangerous and we will have to be careful where we invest.”
Elsewhere, the boom in e-commerce will drive an expansion in logistics and warehousing. Here his focus is on logistics that provide smarter solutions to delivering goods to people at home.
“The last line has to better than it is today,” he reflects. “If patterns of living change so that people shop more where they live than where they work, this might change requirements for logistics too.”
The challenge here is that warehousing and logistics assets with strong fundamentals going forward are already expensive.
“They were expensive before and are more so now,” he says, adding that assets like care homes, government-used properties and medical centres also fall into this most sought-after, costly bracket.
Allocations he is also seeking to grow in a bid to diversify from GDP exposure and tap long term trends and demographics.
“There is a lot of GDP exposure in the overall fund given our equity portfolio,” he said. “We are trying to differentiate and create better risk exposures to these cycles. They are expensive because everyone is trying to buy them but it’s important.”
Sustainability, like a building’s energy consumption or water use, is another important differentiator in the hunt for assets given its importance in both attracting tenants or employees to properties, and buyers when it comes to sell.
“In order to be competitive you need to make sure you have an asset that is well run in terms of ESG,” he says. “Our view is that we don’t have to give up returns for ESG. We don’t see any contradiction here and there are plenty of opportunities to invest with good returns and ESG in infrastructure and real estate.”
It’s a strategy that has led to tough conversations with managers in recent years.
“A manager’s view on ESG will decide if we invest with them or not. However, we also work with managers and try to influence them; if we feel their policies are not up to our standards we will try and get them to change. Overtime we need alignment; this is a big issue for all our managers, and they understand the importance.”
Sweden vs overseas
The real estate allocation is divided 45:55 between Swedish and international assets respectively but he says this may change depending on opportunities coming out of the pandemic. The domestic allocation is managed internally and comprises direct investment, plus a number of joint ventures. “We will continue to work with managers where we don’t have the edge but in general in Sweden, we do it ourselves.”
In contrast, overseas investments are with managers, where partners are chosen for their expertise, control and alignment, plus the ability to offer Alecta scale and the potential to deploy large amounts of capital. “We are a small organization but we are quite a big pension fund,” he says, adding that overseas investments typically comprise co-investment alongside managers and club deals. “Our size helps us more than it hinders,” he says, adding that Alecta’s values and expertise make the pension fund a sought-after partner. “We are long term and consistent and this is what most managers want in a client. We will be an investment partners for quite some time and this is appreciated by managers. It is a competitive market, and we have a lot of things that we bring to the table.”
Alongside diversification and returns, the strategy is also being driven by the need to ward against inflation.
“It’s fair to assume that the risk of future inflation is not negligible. Central banks will allow inflation to emerge; it is definitely a scenario that exists, and these assets will help our overall portfolio to be more resilient.”
It leads him to reflect on high asset prices across the board, something he says is a consequence of years of central bank manipulation of interest rates to stimulate struggling economies. It’s a trend that will be around for a while yet.
“Show me an asset that isn’t expensive,” he concludes. “Assets are expensive; this is going to continue and increases the risk of unknown shocks to the system for a while yet. Diversification is a good strategy, even though some of the assets we might buy are expensive.”