Real Assets Quarterly - January Quarter 2020 FRONTIER - Frontier Advisors
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FRONTIER Real Assets Quarterly January Quarter 2020
Isabelle Demir Jennifer Manish Rastogi Martin Thompson
Johnstone-Kaiser
Branka Needham Ben Woolley Bianca Ray Ian Crane
Now in the longest period of continuous job growth, the US While there are some signs that the expansionary phase
macroeconomic outlook remains healthy. The Tax Cuts and of the economic cycle may be easing, property market
Jobs Act and the Qualified Opportunity Zones (8,760 fundamentals broadly remain robust.
nationally) program has generated strong benefits for many
lower-income, urban real estate markets.
Source: AEW, CBRE
US offices continue to perform strongly as employment Increasingly searching for sources of differentiation to attract
remains high. Despite a moderate increase in supply, the the top talent, tenants are now also looking to landlords to
insatiable appetite from tech tenants for additional space provide an expanded range of services, such as gyms,
continues to drive vacancy lower and rents higher. The wellness centres, shuttle services and even surfboard storage.
emerging requirements of this relatively new class of
corporate tenant mean that previously coveted skyscrapers In: Hudson Yards, Austin, Playa Vista, Bay Area.
are increasingly out of favour, replaced by a preference for
creative workspace in unique structures. Out: Midtown New York.
Key attributes of the emerging office space include Frontier view: Office markets remain buoyant and near-term
walkability, public transportation linkages, local amenity, rental growth is anticipated. However, in the absence of
open plans, natural light and dog-friendly policies. Creative perennial growth from insatiable tech tenants, the
spaces often include large break out areas for “town hall” meaningful pipeline of new development underway could
meetings and stairways are being co-opted to provide test the depth of the US occupier market.
stadium-style seating (see Figure 1).
Source: Interior Design
The bifurcation in the retail market continues. Class-A malls Frontier also inspected a mall in Nashville, Tennessee, where
with a luxury offer and strong service mentality continue to approximately 50% of the total lettable area has been
perform relatively well. Similarly, convenience and converted into medical offices. The space, which was entirely
neighbourhood-type assets (i.e. strip centres) are trading leased to the medical arm of a large local university, provides
well. a full suite of out patient services. The impact of high foot
traffic means that medical patients are also having a positive
Concurrent to this thematic is the growth of omni-channel,
effect on the retail component of the centre, which is fully
with click-and-collect gaining increasing attention as retailers
leased and reportedly trading strongly.
seek to defend their profit margins and leverage their existing
physical footprints (see Chart 2). There is also an increasing
In: Accessible, service-oriented, multi-purpose, luxury, local.
focus on walkable centres that incorporate multiple uses
(health, beauty, co-working, childcare etc.), innovative
Out: Department stores, poor transportation linkages, limited
retailers, and local and/or concept food offers.
walkability, undifferentiated offerings.
Notwithstanding the ability for strong centres to drive foot
traffic, lease negotiations remain challenging as there is less
Frontier view: The retail property market remains challenging
depth in the tenant market, often limiting rent growth.
as the shake-out from e-commerce continues. While broad-
Frontier also observed several interesting retail conversion brush negative sentiment exists, highly active, specialist and
projects, where old department stores are being converted contrarian investors are reportedly finding some value.
into other uses. For example, several old Sears stores are
being converted into creative office space. Given the typically
large floor plates and direct access to transport, those assets
in prime locations are commanding premium rents. Unlike
Australia, department stores are often held in separate
ownership structures to the broader mall, meaning the sale
and conversion of this space is relatively more
straightforward.
5,800
3,414
2,451
Jan 2018 June 2018 Dec 2018
Source: Sender One
Note: Includes Walmart, Kroger, Target, Ahold and Albertsons
Source: Longpoint, CommonSense Robots
Source: Frontier Source: One Hundred Oaks
The US logistics market continues to go from strength to Interestingly, the “last mile” segment of home delivery
strength. A robust economic backdrop is combining with the reportedly contributes 40% of a product’s total delivery cost.
ongoing retail supply chain evolution to drive continued Given the sizeable cost burden, long-term investors need to
demand for the sector. This has meant that net operating watch for new iterations of parcel delivery models to service
income growth for most managers in the logistics space is consumers. Amazon is reportedly negotiating air rights in new
accelerating as demand outstrips supply. leases, while UPS and CVS recently trialled home delivery
using drones. Autonomous vehicles could similarly have a
Although the supply chain reconfiguration is a lengthy large impact.
process, there is evidence that the most prominent logistics
provider (which has taken up significant swathes of Frontier observed that while high-bay, high floor load
distribution space over the past decade) is beginning to shift capacity, multi-dock facilities are required by some users,
its focus towards last mile delivery. While the stabilised value for many, the focus remains on location. That said, as the
of bulk distribution centres now exceeds replacement cost sophistication of tenants’ warehousing systems evolve,
(making new supply viable), the impact of rising land values higher specification assets will likely be required.
and construction costs inhibits the construction of last mile
facilities in most markets. This should create favourable In: Assets with access to transport nodes (ports, rail,
supply/demand fundamentals for light industrial in inner distribution hubs), access to labour, and access to population
metropolitan locations. centres.
Given historically low levels of unemployment, numerous Out: Not much as this stage!
operators discussed the challenges caused by limited pools of
qualified labour. To this point, one third-party logistics Frontier View: A robust economy and continued
operator reported lower error rates than completely reconfiguration of retail supply chains should continue to
automated warehouses by employing skilled labour and support rental growth in the sector. However, investors need
paying above-market wages. The challenge in accessing to be cognisant of the supply impact on bulk distribution and
qualified labour has therefore become a key consideration potential for future disruption caused by new delivery
when choosing a location. technologies.
As is observed in many developed nations, the US is Given the supply/demand dynamic at play, Frontier observed
experiencing a critical housing shortage and unaffordability several groups which invest in product that specifically meets
issue. By some reports, the US market requires an additional the needs of middle-to-low income earners (i.e. can be rented
4.6 million units by 2030. Despite an uptick in completions in at a maximum of 30% of their wage).
2017 and 2018 the supply of new multi-family space is
decelerating for reasons outlined below. Positively, increasing attention is being given to sustainability
initiatives as a means of reducing the cost of living pressures
Frontier observed a large migration towards states with low on tenants, while social programs are used to enrich the
income taxes (Texas, Tennessee, Washington) and out of livelihood of the community which have the additional
geographies with high taxes (California, New York), as price- benefit of improving tenant retention.
sensitive individuals seek to improve their standard of life.
To offset the lost revenue from income taxes, councils will In: High amenity, well-located or affordable product in states
often increase land taxes (which is more politically palatable), with low income taxes.
thus impacting real estate investors.
Out: Undermanaged and dated assets in high income tax
While the same issues with land and construction costs apply states.
to multi-family, many councils are also requiring affordable
housing quotas in new projects. Although this policy intends Frontier view: Demand growth in geographies with a low cost
to meet the challenges of increasing unaffordability, in the of living is expected to continue. However, investors need to
short-term, it appears to have had the unintended be cognisant of the lower supply barriers in some of these
consequence of reducing overall supply. In addition, most of markets and the tendency for councils to increase land taxes.
the new product that has been delivered in recent years has
concentrated on up-market class A stock, providing little for
middle America.
Source: Carion Globes
1 Year Total returns Index composition
3 Yr 5 Yr 10 Yr 15 Yr 20 Yr 25 Yr Capital Weight
Income Capital Total Assets
(%p.a.) (%p.a.) (%p.a.) (%p.a.) (%p.a.) (%p.a.) value $m %
All property - 5.2 2.4 7.8 10.2 11.1 10.3 10.2 10.4 10.3 1,391 198,819 100
Retail 5.1 -2.2 2.7 6.8 8.5 9.0 9.4 10.3 10.2 461 76,251 38
Office 5.2 5.7 11.2 13.0 12.9 11.0 10.7 10.2 10.0 371 94,688 48
Industrial 5.9 6.5 12.8 11.5 12.6 11.4 10.3 10.8 11.5 393 19,459 10
Other (inc. 6.7 1.2 8.0 12.0 14.4 13.1 12.2 - - 171 9,468 5
Retail—
Australia
Super/major
4.5 -2.3 2.0 6.5 7.5 8.3 9.1 10.2 10.1 64 39,269 20
regional
Regional 5.6 -4.8 0.5 5.1 7.6 8.7 9.6 10.0 9.8 31 7,416 4
Sub regional 5.9 -4.5 1.1 5.9 8.5 9.1 9.3 10.5 10.5 77 10,382 5
Neighbour-
5.7 -3.6 2.0 6.2 9.2 9.5 9.1 10.3 10.7 69 3,541 2
hood
Other 5.5 1.4 7.0 9.1 10.8 10.7 10.5 - - 141 13,064 7
Office -
Australia
Premium
5.3 4.5 10.1 11.7 12.0 10.7 10.8 10.2 9.9 62 29,823 15
grade CBD
Grade A CBD 5.0 6.3 11.6 13.7 13.2 11.2 10.8 10.1 9.7 135 42,288 21
Grade B CBD 5.4 5.3 10.9 15.3 15.4 11.6 11.5 11.1 10.3 29 2,980 1
Non-CBD 5.4 6.3 12.1 12.8 13.1 11.1 10.2 2.4 2.8 133 18,270 9
Industrial -
Australia
Warehouse 5.6 6.6 12.5 11.5 13.9 12.4 11.3 11.3 11.7 150 5,845 3
Distribution 5.9 6.4 12.7 10.9 11.5 10.9 10.7 11.1 11.1 129 7,865 4
Industrial
6.2 6.6 13.2 12.7 13.2 11.1 9.4 10.4 11.4 29 1,936 1
estate
International
IPD UK All
5.2 -2.1 2.9 7.6 8.1 9.8 6.4 7.7 6.1 N.A. N.A. N.A.
Property
IPD Europe Ex
4.0 4.6 8.8 8.7 8.2 6.2 6.7 N.A. N.A. N.A. N.A. N.A.
-UK
NCREIF US
N.A. N.A. 6.2 6.8 8.6 9.8 8.6 8.8 9.4 N.A. N.A. N.A.
NPI
REITs
S&P/ASX 300
N.A. N.A. 18.4 9.5 13.8 11.1 5.6 7.7 8.5 N.A. N.A. N.A.
AREIT
FTSE EPRA
N.A. N.A. 13.5 6.9 9.0 11.2 N.A. N.A. N.A. N.A. N.A. N.A.
GREIT $A (H)
Transaction Vendor/
Region Transaction Sector Acquirer Comment
Size (m) grantor
Formosa 2
Development of the
(Hai Neng)
Swancor(25%), 376MW offshore wind
Asia 376MW Renewables AUD 2,974.35 N/A
Macquarie(75%) farm off the coast of
Offshore Wind
Taiwan.
Farm
PSP The partial
Investments, privatisation of Western
Western HESTA, Australia's land titles
Government
Australia Land Social SunSuper, registry, 'Landgate'
Australia AUD 1,410.00 of Western
Titles Infrastructure Macquarie through the sale of its
Australia
Privatisation Australian automated functions
Infrastructure through a 40 year
Trust concession.
IFM
M5 West Australian Minority stake sale in the
Motorway Infrastructure Transurban M5 West Motorway
Australia Transport AUD 468.00
Acquisition Fund (IFMAI), Group which will connect with
(34.62%) Utilities Trust WestConnex.
of Australia
Sea Swift operates a
shipping service to
QIC Global remote communities in
Australia Sea Swift Transport AUD 300.00 Infrastructure far north Queensland
Fund and the Northern
Territory. It has 27
vessels across 9 depots.Transaction Vendor/
Region Transaction Sector Acquirer Comment
Size (m) grantor
ExxonMobil ENI(69.6%), ExxonMobil's sale of its
AUD
Europe Norway Energy ExxonMobil HitecVision Norwegian upstream oil
6,529.82
Upstream Assets (30.4%) and gas fields.
A 480MW offshore wind
Saint Nazaire French Enbridge(49%), farm that is part of the
AUD
Europe 480MW Wind Renewables Ministry of EDF Renewable French government's
3,935.60
Farm Project Environment (51%) 3GW offshore wind
tender of 2012.
Partnership to roll out
InfraVia fibre-to-the-home
Iliad FTTH Entity AUD
Europe Telecomms. Iliad European Fund connections points in
Sale (51%) 3,801.49
IV medium and low-density
areas of France.
448MW offshore wind
Neart Na Gaoithe ESB group farm, backed by a 15-year
AUD UK Crown
Europe 448MW Wind Renewables (50%), EDF Certificate for Difference
3,797.40 Estate
Farm (50%) with atrike price of GBP
130/MWh
Macquarie
MIRA, Allianz IGH owns and operates
Capital around 64,500km of gas
Innogy Grid
AUD Partners , pipeline, equivalent to
Europe Holding (IGH) Energy RWE AG
3,070.56 British Columbia 80% of the Czech
(50.04%)
Investment Republics gas distribution
Management network.
Corporation
Chevron UK Oil AUD
Europe Energy Chevron Delek Group North Sea oil & gas fields.
and Gas Portfolio 2,452.19Transaction Vendor/
Region Transaction Sector Acquirer Comment
Size (m) grantor
Ferrovial
(22.5%), SK
Group(10%),
Macquarie
(22.5%), BAM
A 25 year concession for
PPP PGGM
Silvertown Transport for a new twin-bored road
Europe Transport AUD 2,282.28 Infrastructure
Tunnel PPP London (TfL) tunnel under the River
Coöperatie
Thames
U.A.(22.5%),
Aberdeen
European
Infrastructure
Partners III
Deutsche
EQT Inexio operates 9,900km
Beteiligungs
Europe Inexio (90%) Telecomms. AUD 1,630.18 Infrastructure of fibre optic network
AG,Warburg
IV and six data centres.
Pincus
Equinix Western
Equinix (20%), Six data centres across
Europe Europe Data Telecomms. AUD 1,386.25 N/A
GIC (80%) Western Europe.
Centres Portfolio
Meridiam
Autopista del Sol Ferrovial,Unic Spanish toll road
Europe Transport AUD 954.59 Infrastructure
PPP (85%) aja concession
Europe III
Operation of long-
distance, high-speed
UK services between
West Coast SL Capital
Department London and Edinburgh,
Europe Partnership Transport AUD 869.17 Infrastructure
for Transport including the provision
Rolling Stock II, Rock Rail
(DfT) of 23 new trains and
refurbishment of 56
existing trains.Transaction
Region Transaction Sector Vendor/grantor Acquirer Comment
Size (m)
Los Ramones
Latin America BlackRock, Brookfield
Gas Pipelines AUD
and Energy First Reserve Infrastructure Mexican oil pipelines.
Minority Stake 807.29
Caribbean Corp Fund IV
Sale
250MW facility in the
northern Mexican state of
Latin America
Navojoa Solar AUD Sonora, backed by 15-year
and Renewables N/A X-Elio
PV Plant 277.90 power purchase
Caribbean
agreements and 20-year
clean energy certificates.
Abu Dhabi
Adnoc owns 18 oil pipelines
ADNOC Crude AUD National Oil
Middle East Energy GIC with a total length of
Oil Pipeline (6%) 883.66 Company
750km
(Adnoc)
Regulated electric utility
JP Morgan
that serves 417,000 retail
North El Paso Electric AUD El Paso Electric Infrastructure
Power and wholesale customers in
America Co. 6,284.67 Co. Investments
west Texas and southern
Fund
New Mexico.
Buckeye owns and operates
Buckeye IFM Global 6,000 miles of pipeline and
North AUD Buckeye
Partners Energy Infrastructure 115 liquid petroleum
America 3,254.65 Partners
Acquisition Fund terminals, predominantly in
the US.
Kinder Morgan,
A 430-mile pipeline project
Apache
Permian to transport 2 billion cubic
North AUD Corporation,
Highway Energy N/A feet per day of natural gas
America 2,923.10 EagleClaw
Pipeline from Texas to the US Gulf
Midstream
Coast and Mexico markets.
Ventures
Orient Macquarie The sale of Long Beach
Long Beach
North AUD Overseas Infrastructure Container Terminal (LBCT)
Container Transport
America 2,608.76 (International) Partners IV by Overseas Orient
Terminal
Limited (MIP IV) (International) Ltd (OOIL).Transactio
Region Transaction Sector Vendor/grantor Acquirer Comment
n Size (m)
AMICO (5%),
Salini Impregilo
Infrastructure (21%), Hitachi
North AUD 20 km of new light rail in
Hurontario LRT P3 Transport Ontario (20%), Astaldi
America 2,143.16 Toronto.
Metrolinx Group (14%),
John Laing(35%),
Transdev (5%)
BlackRock
ARES-EIF,Cabot Global Energy
Meade Pipeline
North AUD Oil and Gas, and Power A 177-mile gas pipeline in
Central Penn Line Energy
America 2,005.01 WGL Infrastructure Pennsylvania.
Sale (39% Stake)
Midstream MP Fund III, NextEra
Energy
A 385 MW portfolio of US
hydroelectric power
North AUD I Squared Ontario Power generation assets in five
Cube Hydro Renewables
America 1,667.67 Capital Generation states with 19 small to mid
-sized peaking
hydroplants.
Mapletree Portfolio of 10 data
Mapletree Data
North AUD Digital Realty Investments Pte centres and the
Centre Portfolio Telecomms.
America 1,449.87 Trust Digital Realty establishment of a joint
Acquisition
Trust venture on three existing
Concho Resources
North AUD Concho Spur Energy Oil and gas assets in New
Oil and Gas Assets Energy
America 1,367.12 Resources Partners (100%) Mexico.
Acquisition
SteelRiver First State
Patriot Rail owns and
Infrastructure Global
North Patriot Rail & AUD operates 12 short-line
Transport Fund North Diversified
America Ports Sale 757.80 railroads in 14 southern US
America Infrastructure
states.
(SRIFNA) Fund
Acquisition of the
Macquarie operations and fiber assets
Bluebird Network
North AUD Infrastructure of Bluebird Network,
Operations and Telecomms. N/A
America 472.17 Partners IV, REIT a telecommunications
Assets Acquisition
Uniti company in the US
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