During his undergrad days,it was a tug-of-war between law and finance for Corrado Russo, managing director of investments at Timbercreek Asset Management. In the end, the investment world’s pull proved stronger. In the industry for more than 15 years, Russo now manages the Timber-creek Global Real Estate Fund.
Q: How do you choose investments?
We focus on real estate investments with predictable, growing and transparent cash flow streams. We access this cash by investing:
- directly in real estate (approximately 10% private equity);
- in mortgages and other real-estate-secured debt (approximately 10% private debt);
- globally in publicly traded companies that own investment-grade real estate (approximately 60% public equity); and
- in publicly traded debt or hybrid equities (e.g., we have approximately 20% in U.S. REIT preferred shares).
We like companies that own great properties in attractive markets, have management teams that are good stewards of capital and trade below fair value. If you’re considering the office market, look at underlying job growth. Assess if that location attracts a proper talent pool. In the retail sector, you want to understand wage inflation, consumer confidence and unemployment rates.
On the residential/rental side, you must again look for job growth. For example, we’re currently interested in the southeastern U.S. because a lot of manufacturing plants are moving there.
It’s also more attractive to buy properties in areas that have minimal available land. Such areas are either water-locked (e.g., Sydney, Australia), or fully developed through retail and office nodes. For industrial and commercial real estate, we like Singapore because it’s a gateway to Asian emerging markets. Compared to emerging markets this year, Singapore has higher returns, higher dividends and lower volatility. It also displays more stable economic fundamentals.
Q: How do rising interest rates affect real estate investments?
There’s no direct linear relationship between interest rates and real estate. Real estate cash flows tend to keep pace with inflation. If the general economy and GDP are doing better, there will be a rise in demand and the value of real estate. Landlords will have better pricing power and be able to push inflation costs to renters. In addition, as inflation raises the cost to build new real estate, the value of existing structures goes up as well.
If rates don’t go up and there isn’t too much inflation, higher-yielding assets will become more valuable. However, the best compromise is focusing on asset classes and companies (such as real estate) that provide both high current income and growth potential—they’re likely to outperform in either environment.
Q: How do you determine when to buy?
Let’s say you could buy office buildings in New York and they’re trading at 4.5% cap rates. Or, you could buy a U.S. REIT like SL Green or Boston Properties. If a REIT’s trading at a 20% discount to NAV, that implies a cap rate north of 5% (see “The math on cap rates,” this page), and you’re getting a better return. Real estate has a massive private market you can use to judge whether you’re overpaying in the public markets.
Q: What private markets are you most comfortable buying in?
Currently, we’re bullish on multi-family rental units in the southeastern U.S. Given the depressed job growth [there] and persisting weakness in single-family units, the supply is at an all-time low as builders and developers struggle with getting construction debt to build new facilities. We’re seeing some cap rates that are 200 to 300 basis points higher than in Canada. And the cost of debt is still at an all-time low.