AWP Fund Update - August 2023

In this episode, we sit down with a manager of the abrdn Global Premier Properties fund, ticker AWP. 

Transcript

Paul Blane: Hi all and welcome to the latest in the abrdn Closed End Fund podcast series where we catch up with our portfolio managers from around the globe to gain some perspective on the state of the markets and the abrdn closed end funds. 

I'm your host today, Paul Blane, Senior Director with the National Accounts team. And today we'll be focusing on the abrdn Global Premier Properties Fund – ticker AWP. It’s my pleasure to welcome Bill Pekowitz, Portfolio Manager with the Real Assets team. Hi, Bill, it's great to see you. 

Bill Pekowitz: Hi, Paul. Great to see you as well. Thanks for having us.

PB: Absolutely. Bill, if we could, it would be great to start with a general overview of the property markets, in particular, in the closed end fund space. 

BP: Yeah, sure. You know, in what is seeming to be a repeated statement over the last several years, 2023 is proving to be a volatile one, yet again, for both the listed and direct property real estate markets. While year to date, global real estate markets have posted marginally positive returns, the sector has experienced several double-digit rallies and declines along the way. Underlying real estate fundamentals, while not as robust as they were a couple years ago, when demand was accelerating post the COVID lock downs for just about every property type and supply was severely limited, allowing landlords to aggressively increase rental rates - are still positive. With most property types seeing rental growth in the low to mid-single digits. We think that that level of rental growth is conducive to growing cash flows and increasing dividend payouts. 

Thus, since real estate fundamentals are not materially changing, and since most real estate is under contractual leases in place for their cash flows, meaning that the cash flows are relatively stable, we attribute the vast majority of the volatility, to the actions of the central banks around the globe as they continue to fight inflation and the sharp increases that we have seen in interest rates over the last, you know, 18 to 24 months. 

While we are likely getting closer to an end to the interest rate hike cycle, absent a severe global recession, which admittedly we don't think would be good for any risk assets. We don't believe rates are going to materially decline in the near term. That in itself is not really a concern, we think that real estate has historically been able to perform at with interest rates in this current level. But we think it will continue to raise questions in the markets' mind over just where real estate valuations are and the potential for some asset price declines in the coming six to 12 months. That said, we'd argue that the vast majority of that is already reflected in the prices we're seeing for publicly traded companies that our Fund invests in.

PB: Thanks for that Bill, we appreciate that overview. Could I ask, would share the overall strategy of AWP, the abrdn Global Premier properties fund?

BP: Yeah, sure. The Global Premier Properties fund aims to provide capital appreciation and income through investing primarily in publicly traded stocks of real estate companies, including REITs, developers and operating companies. By investing in listed companies, we believe we can generate real estate like returns over the entire cycle in a more liquid and cost-efficient manner, than through direct property investment. Our team focuses on investing around the globe and across property sectors, utilising both our outlook for top down macro-economic conditions and real estate fundamentals like supply and demand, rental growth potential, and the regulatory environment to drive regional and sector allocations, and then overlay this with a bottom up company specific analysis to create a portfolio that reflects our views of the market. We believe the combination of that top down and bottom-up analysis is key to real estate investing, as it allows us to not only identify property markets that are best positioned to outperform, but also invest in those companies and management teams that are best positioned to capitalise on these opportunities.

PB: Thank you for that. Bill, in terms of sectors that you are investing or perhaps not investing. Where are you finding opportunities that you feel are most relevant to AWP?

BP: I think the key thing to remember is when we think about real estate investing, and we think of real estate, we think of it as a sector that is constantly undergoing evolution and change. And you have to therefore be willing to evolve with it, with the sector. And we're trying to identify thematics that we think are going to drive opportunities over time. 

So, kind of some of the key thematic investment approaches that we're taking today are, we look at things like the digital integration of the economy. In that area, we focus not only on telecommunication, data delivery, and data storage, but we also look at, you know we think that's an area also where - how we are getting goods and services to people is a key driver there. As such, you know, we look at things like the data centre space. And we think that there's tremendous opportunity for data centres to continue to see outsize growth over the coming years. We believe that because the increased use of the cloud is driving just greater demand for this space. And then on top of that, we get to overlay our view that AI is something that is here to stay, and we'll be growing over the next decade. We aren't able to identify who is going to be the winners in that space. But we can say that the computing needs and the power needs, and the connection to high-speed, networks will be a key for AI growth to occur. And therefore we think that drives greater demand for the data centre space and so that is an area that we are keenly invested in right now. 

Additionally, we like the industrial sector and here's a sector where this has been a long-term holding for this fund. And we were looking at the growth of Ecommerce, which accelerated during - obviously during the pandemic, but we think continues to evolve, and is continuing to push people to look for faster delivery of goods and services. That's going to cause a number of companies to have to change their supply chains globally. And as that supply chain changes, and evolves, we'll see greater demand for logistics properties. And so, that's another area that we are very much invested in. 

One of the other thematics that we are investing in is demographics. And along that we think there are two distinct age cohorts that we believe are going to drive and see outsized demand over the next decade. First is, you know, we look at the millennial generation, which has now entered their 30s. And like their parents, and the generations before them, are proving that family formation is something that's going to occur with them. And you are seeing with that demand for more and desire for more space.  Urban apartments, which were great when your main focus was being close to work, and nightlife options - just aren't as desirable when you have children at home and you need more space for all of the stuff that comes with that. 

Unlike their parents generation, however, housing options in many countries are just not affordable for the vast majority of people. As such, we think that as opposed to home purchases, we're going to see greater usage of single-family homes that are rented. And we think this becomes just a very attractive and more affordable alternative for people. And therefore that is another area that we are actively investing in, in the fund. 

On the other side of that age demographic spectrum, is the coming of what we're calling the ‘silver tsunami’. In places like Japan, Europe, US, China will see this in the future where you have a large portion of the population that is ageing. And as that population enters their 70s and 80s, we're going to see just a greater demand for senior housing and other health care facilities just to take care of these individuals. And right now, many countries unfortunately do not have the infrastructure built out to handle this influx of an ageing population. And so, we think therefore landlords who are in that space are going to see outsize demand growth over the next few years, which is going to lead to rental growth, which will lead to greater cash flows for our funds.

PB: Thank you. You know, you just shared a lot of reasons why an investor listening today should potentially consider investing in the real estate markets. But I'm going to ask you regardless, could you share your thoughts on why someone might consider investing in the real estate markets? And the second part of that question would be, if they're investing in the real estate markets, where appropriate why they should select the abrdn Global Premier Property fund.

BP: So I think having weathered rising interest rates and inflationary concerns that took hold over the last 18 months, real estate space as now unfortunately, it's found itself yet again in the crosshairs of investor concerns following the crisis that we saw earlier this year in regional banks in the US. Many investors are now looking to credit availability and the possible rise in defaults, as a potential risk factor for the banking sector and the ramifications of this concern on real estate valuations. 

We acknowledge that real estate sector will be negatively impacted by a reduction in credit availability, which can weigh on valuations. That said, and we think importantly, the public markets already reflect much of this correction in valuations, as REITs are currently trading at sizeable discounts to net asset values across the globe. Furthermore, sectors where we think there is the greatest risk to valuation declines and financial concerns - a sector like the office sector - that's an area that we are currently not particularly invested in, in this fund, as we think there are a number of concerns in that space that we think, are going to weigh on that space for a very long time. And so because of the ability of our fund to not be forced to invest in any particular property type, we can adapt our funds holdings to be best positioned for those segments of the market that can still see price appreciation, while avoiding the sectors where we think there's the greatest risks. 

Also, we think that right now, listed real estate company balance sheets, in general remain strong. And a disruption that may occur in private real estate markets, will actually provide an opportunity for the better management teams that we invest with, to actually grow their portfolios as they will be able to buy distressed properties as they come to market as those concerns on the credit markets impact lower quality or more levered management teams that are going to be under pressure. And so because of that, we think that the listed market has opportunities to deliver growth over the next several years. That said, we think in a fund like AWP, our focus on active portfolio management focused on sectors with better underlying supply and demand fundamentals, higher quality assets, better balance sheets - we think those are the things that will drive outperformance in the coming years.

PB: Bill, thank you very much for your time. It's been great speaking with you today. We really appreciate all your insights.

BP: Thank you, Paul, for having me.

PB: Absolutely. For those interested in learning more about the abrdn Global Premier Property fund - ticker AWP - I'm going to give you three options; please visit us at abrdn.com, that's a arbdn.com; email us at investor.relations@abrdn.com or feel free to call 1-800-522-5465. Thanks again Bill.

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