Established in 2004, Resolution Capital Limited is a specialist global listed real assets securities manager with a successful long-term investment track record dating back to 1995 and ardent culture of fiduciary responsibility. The firm is majority employee owned and headquartered in Sydney, Australia, and has an office in New York, US.
Resolution Capital believes that listed real assets is an excellent means of gaining exposure to the underlying returns of some of the world’s highest quality real estate and infrastructure assets in a simple, transparent, liquid and tax efficient form.
Resolution Capital is a fundamental investment manager with the objective of delivering superior risk-adjusted long-term returns, compared with recognised industry benchmarks. This is achieved through investment in a concentrated portfolio of carefully selected listed real estate and infrastructure securities with an emphasis on avoiding fundamental flaws which could reasonably result in permanent impairment of the underlying investments. This aligns our investment process and security selection with clients’ objectives of long-term real wealth creation.
Resolution Capital’s investment philosophy is based on three fundamental components - focus on real estate quality with defensible cash flows, focus on conservative capital structures to protect our clients from the permanent impairment of their capital, and focus on corporate stewardship of investee companies. These three core principles foster an investment approach which leads to investment portfolios that possess visible, recurring cash flows, conservative capital structures and which are operated by experienced, capable and aligned management teams.
Our investment philosophy is focused on ‘best in class’ companies and Environmental, Social and Governance (ESG) considerations are an integral part of the Resolution Capital investment philosophy. We believe ESG initiatives benefit the broader community and that strong ESG practices of the companies in which we invest are likely to be additive to their performance and lead to investors ultimately being rewarded through superior investment outcomes.
The team is well resourced for the effective management of portfolios within the strategy with four portfolio managers supported by four investment analysts in addition to the internal trading, quant, ESG, operations and client services teams.
Resolution Capital manages discrete (separate) accounts and pooled funds for wholesale and retail clients. Our clients are predominantly institutional clients, pension funds, investment platforms, financial advisers and their clients worldwide.
Sector forecasts
Within the U.S., the Global REIT’s team holds strong conviction in several sectors: data centres, residential, healthcare, and shopping centres. Below, we provide our views on these sectors, along with other sectors.
Data Centres – Still in the clouds
The data centre sector is poised to capitalize on robust structural demand growth fuelled by the digital transformation in all aspects of daily life. Cloud adoption is projected to remain a significant driver of demand in the medium term, with the corporate adoption rate in the U.S. hovering around 50%, suggesting a long runway for further growth. Artificial Intelligence (AI) is expected to further boost demand, particularly as the AI workloads are significantly more intensive. Large cloud service providers continue to commit increasing levels of capital expenditure to cater for anticipated growth.
Consequently, data centre leasing activity has surged to record levels and rent growth has inflected positively. While supply growth is elevated in the U.S., much of the new supply is pre-leased. Furthermore, there are significant constraints on further data centre supply due to capacity constraints in the electricity grid as load demand is rising due to the green energy transition, onshoring of energy intensive manufacturing activities (silicon chips), as well as data centre demand itself, particularly from AI applications.
Residential – An unprecedented affordability gap
Higher interest rates and resilient house prices have pushed the relative affordability gap between renting and homeownership to unprecedented levels, thus favouring apartment and single-family rental landlords. While job growth and wage increases are modestly easing, they remain supportive of demand.
Single-family landlords are reaping the benefits of favourable supply and demand dynamics. Supply remains restrained compared to past decades, while the growth in single-family household formations is expected to surge, driven not only by economic factors but also by the lifestyle preferences of younger generations. Institutional single-family landlords continue to refine their operational platforms and scale benefits, which will also contribute to earnings growth.
In the apartment sector, following robust operating performance in the past two years, fundamentals and rental growth have moderated, albeit to varying degrees across regions. Notably, rental growth expectations in coastal markets appear relatively stronger compared to sunbelt markets at present. While sunbelt demand continues to thrive due to robust population and job growth, elevated supply growth is expected to exert pressure on the region in the near term.
Healthcare – Surfing the grey wave
Seniors housing comprises a sizeable portion of Healthcare REIT portfolios in which we are invested. We expect seniors housing will continue to benefit from a recovery in occupancy and an improvement in operating margins, leading to pronounced cash flow growth. The ongoing recovery will be further boosted by an increase in demand stemming from the aging baby boomer generation. Meanwhile, rents remain affordable for prospective tenants due to surging household net worth in the past decade.
Supply growth remains well below pre-pandemic levels as rising construction costs and tighter lending conditions for developers constrains inventory growth. These fundamentals suggest that landlords should experience a tailwind in pricing power. For further insight see – “The Grey Wave – Opportunities in U.S. Seniors Housing”.
Retail – Bricks remain the bedrock
U.S. strip centre REITs remain attractively priced at discounts to intrinsic values and replacement cost, against a backdrop of favourable fundamentals. The pandemic accelerated retailer investment in, and adoption of, multi-channel retail: buy-online-pickup-in-store and fulfilment from store has allowed products to be cost effectively and safely delivered. In turn, shopping centre REIT portfolios have been endorsed as last-mile real estate. Data supports this trend; notably omni-channel ecommerce penetration is growing faster than total ecommerce penetration at large.
Despite economic uncertainties, retailers remain committed to store expansion plans, actively assessing opportunities for new openings beyond 2024. Store closures remain at a decade-low, with positive net absorption and historically low vacancy rates occurring amidst minimal supply additions. Importantly, construction volumes in the retail sector have remained well below historic averages for more than 15 years. Landlords affirm the overall health of their tenant bases compared to recent history. It is important to acknowledge that retailer bankruptcies are an unavoidable outcome of evolving competition and shifting consumer behaviours. Yet, these bankruptcies also present opportunities for landlords to upgrade tenant mixes and realize significant rental increases.
Industrial – Letting the hot air out
The accelerated adoption of ecommerce during the pandemic led to strong net absorption, surpassing elevated supply levels from 2020 to 2022. Consequently, market rents experienced unprecedented growth rates. Presently, supply growth remains elevated, while demand is moderating (or normalizing), thus beginning to constrain market rental growth and weaken landlord pricing power. Although in-place rents are still below market rates due to long-lease terms, this positive reversion appears factored into valuations.
Office – Frail fundamentals
Office demand is still experiencing widespread weakness in most U.S. markets, attributed to the shift towards hybrid work arrangements, particularly amongst technology tenants. As a result there is a disconnect between strong employment conditions and office occupancy, with vacancy rates at record high levels putting downward pressure on net effective rental growth (accounting for tenant incentives).
The landscape is further complicated by elevated private-landlord office debt maturities and an increase in loan defaults. For further insight see – “Another banking crisis, How are REITs positioned?”
Amongst the distress, the ‘flight to quality’ trend is offering marginal support to pricing power for select landlords, particularly REITs, which possess high-quality portfolios situated in desirable micro-markets and relatively sound balance sheets. Office REIT valuations remain discounted, with implied values well below replacement cost, and most valuation metrics at or near historic lows.
Self-storage – Waiting for the Fed
In the U.S., self-storage operating trends are experiencing a slowdown from the buoyant conditions experienced during the pandemic, largely attributed to stalled housing market transaction activity, which significantly impacts storage demand. Operators find themselves embroiled in a price war, slashing move-in rates to maintain occupancy levels. Move-in rates are currently approximately 35% below the average in-place rents, although operators typically raise prices substantially soon after the customer moves in. In this environment, REITs equipped with more sophisticated operating platforms, prioritizing occupancy management, are gaining market share from smaller private operators.
We anticipate a positive shift in demand when interest rates begin to decline, stimulating increased home sales. However, the projected growth in supply may exert pressure on landlord pricing power. Despite a moderation in supply relative to recent history, supply remains elevated in absolute terms, comprising 3% of the total stock.
Hotels – Moderating pent-up demand
Following the surge in demand during the post-COVID reopening, income growth is moderating and now expected to stabilise around low-single digits, assuming no material deterioration in economic conditions. However, there are positive trends including moderating operating expense pressures. REIT portfolios are concentrated in upper-upscale hotels (a tier below luxury), which experience more resilient demand given the profile of their customer base. From a corporate perspective, both group and business transient demand continue to recover. Additionally, international travel to the U.S. which makes up roughly 10-15% of overall U.S. demand is still recovering, despite facing challenges including the strong U.S. dollar affecting inbound and outbound travel. The supply growth outlook is modest.
Investment principles & strategy
Primarily through bottom-up research, Resolution Capital seeks to identify and invest in a select group of high-quality stocks which afford unique characteristics that the market continues to underappreciate. The team adopts a concentrated portfolio construction approach that invests in a select number of securities in its listed real estate and infrastructure portfolios.
The bottom-up analysis undertaken by the investment team is reviewed in conjunction with the identification of ‘top-down’, broader investment and direct real estate and infrastructure specific themes. Supporting the bottom-up philosophy is the division of research responsibilities amongst the investment team by sector, rather than region.
The investment team members are specialists in their respective sectors, having travelled widely and been exposed to world best practices. They are uniquely equipped to evaluate companies and their management teams against global peers. By adopting this philosophy, Resolution Capital believes it can create portfolios which have the greatest prospect of delivering returns above inflation and consistent, sustainable, long-term outperformance.
Approach to ESG and Responsible Investment
ESG considerations are an integral part of the Resolution Capital investment philosophy. We believe these initiatives benefit the broader community. Additionally, strong ESG practices are likely to be additive to investment outcomes.
Resolution Capital has observed that environmentally friendly assets make better business sense, particularly because they tend to generate greater tenant demand due to several factors. Environmental policies that lead to greater energy, water and waste efficiencies reduce operating expenses, making assets more profitable and environmentally sustainable. Additionally, we are seeing that tenants and consumers are increasingly setting their own minimum environmental performance standards for sustainability. As a result, buildings that meet these requirements are more likely to have higher occupancy. Finally, buildings with high environmental standards may receive better pricing upon sale, due to a wider pool of potential buyers. It is financially responsible for management to pursue property investments and property management initiatives which are environmentally sustainable.
Resolution Capital’s goals also include being a good corporate citizen by “practising what we preach”, and using our position as an active shareholder to influence the companies in which we invest to also consider sustainability in their businesses. For further insight please see our annual and quarterly ESG reports
Strategic corporate development
The firm has experienced robust growth in its global property securities strategy in the last few years and this strategy accounts for the majority of firm assets under management. In addition, the firm launched a global listed infrastructure capability in 2021.
Resolution Capital is seeing increased demand for its strategies from offshore clients which currently account for approximately 51% of the global property security strategy’s assets under management. Resolution Capital’s growing pool of institutional clients are spread globally in the UK, Europe, U.S., Canada, South Africa, the Middle East, Asia, Australia, and New Zealand.
Performance verification
Resolution Capital claims compliance with the Global Investment Performance Standards (GIPS®). Resolution Capital has been independently verified by ACA Group for the period between 1 January 2007 and 31 December 2023.
Compliance Statement
Resolution Capital believes the information contained in this material is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Any opinions and forecasts reflect the judgment and assumptions of Resolution Capital and its representatives based on information available as at the date of publication and may later change without notice. To the extent permitted by law, Resolution Capital disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information.
