SYDNEY: Australian pension fund Hesta is pivoting back towards the property market as the A$87bil (US$60bil) fund hunts out distressed opportunities among assets struggling with high interest rates.

Hesta had pared its exposure to real estate amid global concerns around the outlook, chief investment officer Sonya Sawtell-Rickson said in an interview.

The fund plans to lift the 5% property holding in its main investment option by “a few” percentage points over the next 12 to 18 months.

“As a thematic for us, it’s quite a shift to again be looking for opportunities in this market,” said Sawtell-Rickson.

“Real estate was one of the few markets where there has been a bit of distress and market repricing.”

Hesta will mainly look at distressed commercial property opportunities in offshore markets, via both equity and debt investments, said Sawtell-Rickson.

“It can be specific balance sheet repair opportunities, it can be secondary trading in fairly core opportunities for investors that require liquidity,” she said.

The commercial real estate sector has suffered a significant downturn since the pandemic. Vacancies climbed in offices and shopping malls as more people worked and shopped from home.

The worst could now be over for valuations as many central banks start lowering interest rates and investors are eyeing troubled assets globally.

Beyond distressed deals, Hesta is looking at multi-family property developments and healthcare, along with increasingly competitive sectors like self-storage and data centres, where the amount of capital needed to meet emerging demand “is going to be significant”, said Sawtell-Rickson.

“Domestically, we’ve been investing in housing, which is really aiming to address some of the supply side challenges we are seeing,” she said.

Australia’s pension industry is facing increased scrutiny as assets near the A$4 trillion mark. About a fifth of the funds’ money is now invested in private markets, a sector that regulators have repeatedly warned they’re keeping a close eye on.

The nation’s central bank, meanwhile, warned last week that the industry’s fast growth could pose risks to Australia’s financial stability.

Hesta is lifting the portion of assets it manages internally to about 20% of total investments from the current level of 16%, helping to better scrutinise private deals and cut costs.

The fund is still looking to add some new roles, including in unlisted markets, Sawtell-Rickson said. 

 - Bloomberg