Summary

00:48 – Introducing Invesco

Paul O’Connor introduces Max Swango, Global Head at Invesco Real Estate, with over \$86B AUM across diversified global strategies.

05:38 – Defining real estate today

Max outlines how property investing has expanded beyond office and retail to include residential, healthcare, logistics, data centers, and more.

10:00 – Key trends and opportunities

He explains the diversification shift: office down to 20% of portfolios, logistics and residential rising as dominant sectors.

12:00 – Short-, medium- and long-term views

Retail is positioned as a near-term opportunity, residential for the medium term, and selective office for the long term.

17:27 – Turnaround and development

Discussion on repurposing assets, repositioning retail, and criteria for high-quality office investments.

20:00 – Data centers debate

Max raises caution on overheated enthusiasm, comparing it to past cycles in life sciences, while noting regional differences (e.g., Korea, Europe).

25:00 – Portfolio construction

Insights into how Invesco dynamically allocates across regions and sectors despite property’s illiquidity.

30:00 – The rise of alternatives

Max highlights property’s role as a 10–15% allocation in institutional portfolios and current attractive valuations.

32:50 – Leverage and risk

Invesco maintains low, stable leverage with long-term fixed-rate debt to support diversification.

35:00 – Currency and hedging

The firm manages risk with 50% currency hedging and local borrowing strategies.

 Paul O'Connor:

Good morning and welcome to the Netwealth Portfolio Construction Podcast series. I'm Paul O'Connor and my role at Netwealth is head of investments that includes responsibility for the investment menus and the products Netwealth issues as a responsible entity. We have Max Swango from Invesco joining us on today's podcast to discuss the state of the global property market. Max is a managing director and global head of client portfolio management with Invesco Real Estate. Invesco is an independent global investment manager who offer a range of investment strategies across all major asset classes, investment styles and geographies with a focus on talented people, resources and technology to maximize investment opportunities. Invesco service clients in 120 countries employ more than 8,400 employees worldwide and manage 1.85 billion US dollars of assets around the globe as at the end of December 2024. Founded in 1983, Invesco Real Estate is headquartered in Dallas with over 600 employees spread worldwide across 21 offices. As at the end of March last year, Invesco managed 86.4 billion US dollars in assets under management across a range of strategies in both direct and listed real estate representing over 600 properties worldwide.

Max is a managing director and global head of client portfolio management with Invesco Real Estate. A founding partner, he's been with the firm since 1988. For the past 20 years, Max has run the investor side of Invesco's global real estate business. He spent the first 10 years with the firm in the acquisitions group where he originated direct real estate investments that included both equity and debt across the whole risk return spectrum. From 1995 to 1999, he oversaw the firm's West Coast activity from its San Francisco office. Max earned a BBA with a double major in real estate and finance from the University of Texas in Austin. He's based in the Dallas office. There are three Invesco funds on the Netwealth Super and IDPS investment being the Invesco Australian Share Fund, Invesco Senior Secured Income Fund, and Invesco Global Real Estate Fund that Max works on.

The direct or unlisted property asset class includes a very broad spectrum of real estate covering areas such as commercial, retail, office, industrial, logistics, healthcare and residential properties as the main sub-asset classes. I guess a key consideration when people are considering it looking at allocating to the direct or unlisted property market in their client's portfolios is whether to allocate to an Australian real estate strategy or a global real estate strategy. Both certainly have their merits but have noticed that the Australian market's heavily dominated by office, commercial, retail and industrial property. However, global real estate certainly opens up a broader range of sub-asset classes such as residential and logistics property. Direct or unlisted property sub-asset classes also have a differing risk and return characteristic. And what I mean by this is that some sub-asset classes such as industrial property will have a higher correlation to the economic cycle compared to say healthcare that is a far lower correlation and is even considered by some to be recession resistant.

So understanding how a diversified global property fund is managed is key to understanding the risk and return characteristics of the strategy. Office property is we all aware has been in the spotlight I guess since the outbreak of COVID and the changing work dynamic of office workers. So I'll certainly be keen to understand Max's views as to whether this sub-sector offers any opportunities for investors such as Invesco. Maybe to start with Max as a managing director and founding partner of Invesco Real Estate, you've seen it grow to the significant business that it is today and you've been with the firm since 1988. So can you tell me a bit about the Invesco real estate business?

Max Swango:

Of course, Paul, and I've really enjoyed listening to your comments. I don't know that I could have sold Invesco Real Estate or our asset class any better than you just did.

Paul O'Connor:

Thanking you, Max.

Max Swango:

Thank you very much for having me. Invesco Real Estate, we're one of very, very few truly global real estate investment management firms with 21 offices in 16 countries. As you mentioned, almost $90 billion of real estate assets under management. We've invested in both equity and the credit of the real estate business in public and private across the risk return spectrum from core to core plus value added opportunistic. And what all of that does is gives us a significant competitive advantage in the markets because we can go where we see best relative value. If it's time to overweight or underweight the United States, we do that. If it's time to go to Europe or Asia, we can do that. If it's core plus or high return that's interesting or credit versus equity or even within sectors. And I'm sure we'll spend a lot of time talking about that. You've already started to talk about that with the office sector in particular. But that's a pretty unique perspective to be able to have and we've been able to take advantage of that over the last several decades.

Paul O'Connor:

So property managers can differ in my experience in how they view and define property and some will have a broader definition including infrastructure assets. So can we start with how Invesco defines its property investment universe?

Max Swango:

Sure. Traditionally for us it was the four major property types, so office retail, logistics, industrial and multifamily. More recently, that definition has broadened to include some of the sub-sectors that you've already touched on. Within residential, there's a lot of different sub-sectors today. So single-family rentals, build-to-rent, affordable housing, manufactured housing or land lease as you call it in Australia, student housing, senior housing. Within storage, it can be traditional warehouses, cold storage, data storage, and I'm sure we'll talk more about that as well. You talked about healthcare, medical office, life science for example. So all of those different sectors have become a part of the investable universe, which makes it a much more exciting place for us to invest as a firm and makes it more important to have scale. And it gives us another competitive advantage because if you don't have scale then it's hard to have expertise in as many different sectors as we look at today.

Certainly infrastructure is a popular sector today and we'll talk a little bit about that I'm sure. And there is overlap. Where do data centers belong? Are they real estate or are they infrastructure? One of the properties we actually own the police station in Downtown Melbourne. It's an office building basically that's on a twenty-year lease to the city of Melbourne. Is that real estate or is that infrastructure? For us, it's real estate and it's been a very well-performing investment for us. So there is a little bit of overlap with infrastructure, but when we focus on those sectors, that's what we define as real estate.

Paul O'Connor:

What are some of the major trends and themes that you're currently seeing in the unlisted property market there and across office, industrial, commercial, retail? What's sort of striking to the Invesco investment team at the moment?

Max Swango:

So one of the major themes clearly has been the addition of all of the new sectors that I just started to talk about. So if you go back traditionally, especially for Australian investors investing domestically in Australia, half of your portfolio was office and half of your portfolio was retail. And that was property, that's what you got. And today, now especially if you invest globally, you get exposure to all these different sectors and now the office sector is down to call it 20% of an overall portfolio. What used to be 50% office is now 20%. Logistics was almost non-existent. And now logistics is a sector that's become larger than office.

Logistics for us is 22% of a global portfolio. You mentioned residential earlier. Probably our favorite sector today from a medium term opportunity is residential. So that did not exist 10 or 20 years ago, particularly for Australian investors. And today it makes up 14% of our global portfolio, a third of our portfolio within the United States. And then finally of the major sectors is retail. Retail that used to be 50% of a domestic portfolio in Australia is now around 10% of a portfolio. So the trends are more diversification within each sector and that allows an active manager like us to over and underweight sectors where we see the best opportunities.

Paul O'Connor:

I guess, Max, that's where I've seen some benefit of global property over the years, that there are certain sectors I guess that Australian direct property just does not offer. So residential's being one and the huge multifamily sector in the US certainly opens up and provides more diversification in a portfolio there. So I can appreciate the benefits of those growing logistics sector that you mentioned, residential and I guess improved risk and return dynamics that can have on a portfolio. What property subsector do you think at the moment provides the best medium to long-term opportunities? So looking into your crystal ball and understanding that what you do about the state of the market at the moment, where do you think the real opportunities are?

Max Swango:

Interesting and I divide it into short, medium, and long-term opportunities. And for us today, the immediate, the short-term opportunity interestingly is in retail. And I say that because all of the negative things that we think about office today, we were saying about retail 15 years ago. 15 years ago was the beginning of e-commerce and the conversation was we were going to, going forward, we were going to buy everything off a screen off of our phone, it was going to get delivered to our house and we would never to a shopping center, a shopping mall again, what are we going to do with all this? We have way too much retail space. What are we going to do with all these shopping centers? Very similar conversation that we're having about office today. So we've spent the last 15 years building no new retail space, actually having a net negative new supply as we've taken retail space off the market and repurpose into other things.

And over the last 15 years, retailers, the tenants in retail space have figured out how they need to run their business and they figured out that they have to be excellent in both their online presence and their bricks and mortar presence. Now their bricks and mortar presence is different. They don't maybe need 50,000 square foot stores anymore. They need five or 10,000 square foot stores. And they've also learned that when they open a store in a neighborhood, their online sales in that neighborhood go up. So having a very strong bricks and mortar presence is super important for retailers. So no new supply, new demand for retail space. So the real estate fundamentals for retail are very strong. High occupancy rates, growing rates, growing NOIs, growing earnings growth. So the short term favorite sector is retail. The other driver of performance going forward, I talked about real estate fundamentals being one.

The other driver of performance going forward are the capital markets and the capital markets have not yet come back to retail. So there's still a discomfort with more than half of the investors in global institutional quality real estate. They're just not yet ready to come back to the sector. So we're seeing very wide cap rates projected and total return opportunities in retail today. So where cap rates for other commercial sectors might be in the 5 to 6% range, cap rates for retail are in the 7 to 8% range. So you're starting off at a 200 basis point spread and while you don't need to underwrite it to get to a strong total return, it would not surprise us to see that those cap rates come down as the institutional universe starts to recognize the opportunity in retail and more capital goes to the sector. So from a short-term perspective, I really like retail.

Now, from a long-term perspective, I would say office, and I say office because and it's got to be the right kind of office. And I say office for a lot of the same reasons that I've already talked about retail because the office sector is not going away. And as I mentioned, we've reduced our office exposure in our portfolios from what was 50% going all the way back to the 1980s to today 20% or less. So we're much more selective on the kinds of office we want to own, own the kinds of office that are amenity rich in the right locations within the cities where we're seeing very strong population growth in the kinds of industries that future-proofed basically the technology-driven industries. So I do like office from a long-term perspective. I think buying office today is interesting. It doesn't necessarily, it's hard to do in a core portfolio higher risk with an investor that's willing to take a longer-term perspective and take more risk.

It's an interesting long-term investment. Now to put something in the middle of that sort of a medium term best idea or favorite sector, interestingly, I'm sitting in one of our three offices on the West Coast in the United States today, and I grabbed our head of investments in the western part of the US who has the job that I used to have a couple of decades ago. And I asked him what his favorite sector was, knowing that we were going to be having this conversation and he went straight to residential. So now residential for all the reasons you know, I mean we're from a residential perspective globally, it's an Australia thing, it's a US thing and even a European thing.

So owning residential real estate where we are under-supplied globally is a good thing. Now everyone knows that. So residential is pretty expensive today. So I think you buy residential, you invest in residential today, you might be underperforming some of the other sectors in the short term, which is why I like retail better in the short term. But over the medium term, over the next three to five years, we're seeing declining supply in residential, but we're seeing continued demand as homeownership that's very difficult to achieve. Higher interest rates, higher home costs, it's making people rent for a longer period of time, retail in the short term, resi and all kinds of resi that I mentioned earlier in the medium term and office in the long term. How's that for an answer, Paul?

Paul O'Connor:

Yes, yes, it certainly resonates there, Max. Certainly the comments around particularly the affordability of residential, it's a big topic in Australia as I know it's in a number of the other developed western countries around the world. It's obviously getting quite politicized and what have you.

The thing that came to mind as well, you were talking about office and retail, is that a bit of a turnaround story? Does that require development work by Invesco to get some of the older retail style buildings and to repurpose them for the modern retailer and a little bit like office at the moment, I sort of wonder how much development and turnaround work needs to be done on the office buildings to repurpose them for the future?

Max Swango:

Yeah, so the interesting retail opportunities that we're seeing today are a lot of existing product. You're not going to see a whole lot of new supply. You're not going to be required to build new products to get those interesting returns. So a lot of the retail has been repurposed. You're not going to see the power centers that have the big 50,000 square foot anchors that were so popular 15, 20 years ago. Those have been repurposed and the 500,000 square foot retail parts have been turned into 250,000 square foot retail parts with smaller tent spaces. Those are interesting acquisitions today we are starting to see some interesting development opportunities, but they're going to be one offs and fewer and further between. And the only way we would develop a retail center today is with significant pre-leasing, not interested in building speculative retail on the office side.

We still have not. So to buy an office building today or to invest in an office building today, you're really looking for the best of the best buildings based on in the right cities and the right locations within those cities and buildings that are amenity rich that have outstanding rent rolls. So you're looking at buying something that has in-place cash flow that's very stable because it's got a rent roll that's leased to long-term to some very good credit tenants at a going and cap rate that is a premium to all the other sectors. That's where office gets interesting developing offices further down the road. We're not there yet.

Paul O'Connor:

I guess data centers I've always found of interest. And earlier on we touched on property versus infrastructure and I guess some may view data centers as an infrastructure play, but at the end of the day it's all property. But with the ongoing growth of cloud-based computing, are data centers still an attractive investment opportunity or is that portion or sub-asset class starting to mature?

Max Swango:

It's a great question because it's popular. It's a popular topic clearly today for all the right reasons. And the answer to the question is nuanced as most are, and it's different in every country. But interestingly, as I travel around the world, we have 450 institutional investors from all over the world. Most of the largest sovereign wealth funds defined benefit pension funds, corporate pension funds or insurance companies are all investors of ours. And as I meet with them in most of the developed world, they all want to talk about data centers. Interestingly, a year ago, maybe 18 months ago, they all wanted data center exposure. It absolutely, it reminded me a lot of where life science was three or four years ago, three or four years ago, everybody wanted to talk about life science. It was the hot sector. Nothing could go wrong with life science, the aging population around the world, the need for new drugs and pharmaceuticals and all of the new inventions that were happening and longer life science and was just going to create this tremendous demand for life science product.

And nobody had enough exposure to life science and they wanted to put more capital in. Here we are three years later, the world has changed and there's zero demand. We oversupplied the market, we turned a lot of older office buildings into "life science projects" and the demand went to zero. So if you were an institution that invested in a life science only sector-specific fund, you lost probably all of your investment. And I bring that up because a lot of what I hear from investors today when they start talking about data centers, it reminds me of what they said three years ago when they talked about life science and the tremendous demand for data and power, the need for power and all that. So it does raise a red flag to me. It also raises a red flag to me that all of my friends that were doing life science funds three or four years ago are now doing data center funds.

They all have the exact same strategy, which is they want to build it, they want to lease it, and they want to sell it. When you ask them why they want to sell it's because they don't want to own it long term. Now, most of what I'm talking about now is us very US focused because like I said, every country is different. And so to me the whole philosophy of building something that you don't want to own long-term is flawed. I don't understand that. And when I asked them why they don't want to own it, because they don't understand, they don't understand. They don't pretend to understand what the future demand for data centers is going to be. And so they don't want to own it long term. And so who is going to own all these? They're very expensive, they're very large investments.

It's not like buying a hundred million shopping center. These are $500 million plus type investments. A lot of them can be located in place in smaller towns where the highest and best use for if data center doesn't work out. I'm not sure exactly what you turn into. So all of that makes me a little bit nervous about data centers today. Could be wrong. At least in the US it's a very heated sector right now, and I don't know if it's overheated, but it's certainly heated. Now there are other places where we are active in placements like Korea for example. It does feel like it's probably 10 years behind the United States in terms of building out their data center supply chain. You mentioned cloud computing. Korea is behind significantly behind the US and other countries in terms of adopting cloud computing. So there's a lot of demand upside in a country like Korea.

So we are actually building data centers in Korea. We are actively creating powered land for data centers in Europe. And that's an interesting opportunity where you can buy logistics land, get the entitlements and get the power brought to the land that will allow for development of data centers and then sell to a developer. And if the demand for data centers goes away, then you can turn it back into logistics land and get your typical lower double-digit return from a logistics development versus a much higher return for if you are able to pull off a data center development. So data centers is an interesting hot topic, different in every country and in impossible to predict the future, but it's to me maybe it's an interesting part of a broader diversified portfolio, but investing in a sector-specific fund would be risky.

Paul O'Connor:

And I guess one of the key take-outs there, Max, is your comments around that. A lot of the data center buildings are very purpose to built for that purpose. So as you say, if it doesn't work out for a tenant, question remains them what to do with the building and they can be put in the middle of nowhere, so to speak, where the land's cheaper. So I can appreciate those comments there. From a portfolio management perspective, how does Invesco manage the portfolio in terms of consideration of allocation to the sub-sectors but also the different geographic regions and how dynamic can that management be given that property is a fairly illiquid asset that takes some considerable time obviously to divest, et cetera. So how do you think about diversified portfolio management?

Max Swango:

We have global funds, global property funds, but those global property funds feed into our regional funds. The underlying funds that the global funds feed into are run by regional teams. So there's a US fund, a European fund, and a Pan-Asia fund, which would include Australia obviously. So the regional teams are people on the ground in the US five offices in the US, eight offices in Europe, eight in Asia-Pac. Those regional teams are responsible for making allocation decisions among the market and decisions. So going where we see best relative value from a sector and a market perspective by region. And then we have a global allocation committee who looks out over all three regions and will make over and underweight allocation decisions based on where we see opportunities within each region so we can overweight or underweight from us, Europe, and Asia at any given time.

Now, property, the good news, bad news about property is, as you mentioned, it's a private market. You can't buy and sell it on a screen and it takes a while to move a portfolio. So allocation decisions are, they can be done as often as we want to, but they're typically quarterly. And then moving the ship can take a while, but typical portfolio is going to be around 40% US, 30% Asia-Pac, and 30% Europe. And then we'll go plus or minus five to 10% around the regions to give global exposure and just try to take advantage of our global view to add value by slightly tilting the portfolio regionally and by sector within the region.

Paul O'Connor:

In terms of the holding period of the properties, what is the average holding period? And I mean I guess it's going to vary depending the investment thesis of the capital growth, etc. But are you looking at holding properties for a five to 10 year period or are there shorter to duration holdings in the portfolio?

Max Swango:

Super interesting to see how the strategy has evolved over time because 20 years ago, core investing was basically buy high quality properties and own them forever. And that has absolutely changed. And today I don't know that we even do core investing anymore. I would call it more core plus because there's always, when you talk about there's not a such thing as buy a property that you want to own forever and do that, it's much more actively managed today. So an average holding period that might have used to have been 10 or 15 years, which means that half your portfolio you're owning for 15 or 20 years and the other half you're running for five to 10 years now is a much shorter holding period. So I think anything in the three to seven year timeframe is going to be more normal for an actively managed property portfolio. Now, liquidity for these global portfolios, and particularly for the wholesale market, 70% of our portfolios invested in private real estate and 30% of the portfolios invested in more liquid typically G-REITs. So that provides some liquidity for our investors who want more than quarterly liquidity.

Paul O'Connor:

With the of private markets globally, how has this impacted on clients' allocations to direct and unlisted property? And I guess has it been a positive or a negative for flows into the sector there, Max?

Max Swango:

Yeah, it's been a positive, just a broad acceptance of private markets, alternative investments, private markets, that broad acceptance has been a big positive for us. It really hasn't changed the allocation to property. When we started the business in the 1980s, very few investors invested in property. You could count them on one hand in the United States pretty much.

Paul O'Connor:

Was all bonds and equities, I guess.

Max Swango:

It was. It was a 60-40 portfolio back then. Today it's absolutely, property is a 10% holding in almost all institutional investors portfolios in some cases as high as 15% of their portfolios. And just the whole mentality of including alternatives, including private markets, has just reinforced the importance of property having a significant part of a portfolio. If you're not at least 5%, then it's not worth doing. I mean, the next question is why invest in property? And if you're not getting an 8% total return, a minimum 8% total return from something like an alternative investment like property, you wouldn't do it.

And so property has got to return at least an 8% to earn its way into your portfolio. It's got to provide another reason to do it. It's got to be something that's different than everything else in your portfolio. So the public markets, the volatility in the public markets can be damped by adding private markets, investments, including property. And then when you look at the markets today, the public markets, particularly the equity public markets, are trading generally at all-time highs. And property is trading at values that are 25% below what they were two or three years ago. So it's an interesting entry point for property, particularly when you compare it to the other asset classes.

Paul O'Connor:

I guess we've seen the trend with the large institutional investors in Australia, the large industry superannuation funds where they were allocating maybe 30, 35% of their portfolio to private markets. Then separately they consider the allocations underlying in that 35% of the portfolio across private credit, private equity, direct property, direct infrastructure. So I hear you, it's that ongoing trend, I guess an increasing realisation of the benefits that the unlisted assets can have in an overall diversified portfolio there. We've seen direct property funds and I think including your fund use amount of gearing or leverage to varying degrees. So how do you manage leverage in your portfolios?

Max Swango:

Balance sheet management is super important. Something that we think about, it's very high on our list of things that we think about on a daily basis. It's a low leverage portfolio. The average leverage in the portfolio today is 33%, a little bit different in each region, but the average is 33. All of our lenders are relationship institutional lenders, the largest insurance companies in the world. Most of the debt is fixed, long-term fixed rate debt. That is what I would call a sleep at night kind of balance sheet that allows us to, we're not going to add leverage that's not accretive to investment returns. So you buy properties at a 6% income return and you wouldn't add debt that had a higher interest rate than that. So you're incrementing your total return with your leverage and it allows you to build a more diversified portfolio by giving you a larger, you borrow a third of your value, you can buy more assets and further diversify the portfolio. So that's a little bit about how we think about leverage.

Paul O'Connor:

It's interesting. I do find at times some people get a little nervous about the use of leverage in direct property portfolios, but if you think about it, even the listed equity market, I mean all companies access capital only two ways through equity and or debt. So leverage is inherent, I feel across pretty much all asset classes that investors allocate to. So I find that little bit of a misnomer that people can get nervous by the use of gearing or leveraging portfolios for property.

Max Swango:

Well, it makes headlines when you buy a big office building in downtown Los Angeles and you leverage it 75% and values go down more than 25% and you get foreclosed on, and those are the headlines you read. And that's not what is in our portfolio. We're using much lower leverage and we'll leverage the properties that have the most stable and consistent income returns. And that today that tends to be residential properties, not office buildings.

Paul O'Connor:

Maybe just to end with, Max, how does Invesco manage currency exposures in the portfolio, being a global direct property investor? And as you've mentioned, investments across Europe and Korea, the US Asia Pacific, how do you think about currency exposure and how is it managed?

Max Swango:

Yeah, specific to your audience, investing in our global fund out of Australia, half of the total return is hedged, so we'll start there. But one of the ways we think about currency is also we'll borrow when we leverage properties, we'll borrow in local currency. So there's an inherent hedge there. And if you look at currency fluctuations over time, noise and volatility and currencies tends to revert to the mean. And so currency tends to not be a major impact over a long period of time, but we're 50% hedged in our Aussie portfolio. And when you combine that with borrowing and local currency, there's a lot of impairment hedged in the portfolio already.

Paul O'Connor:

And I guess not dissimilar to a lot of investors the way they think about hedging with their international equities, 50% hedged, 50% unhedged in their portfolios. Max, I think we better draw the podcast discussion to an end, but I thank you very much for your comments and your insights into the Invesco real estate property business, how you think about property current opportunities in the market. Found it really interesting, your comments about both retail and office property and I guess the, well, the increasing opportunities and outlook for retail, but also given that I think a lot of people are very nervous about office property, but I guess it's when a certain famous US investor Warren, taught us to be fearful when others are greedy and to be greedy when others are fearful. So some of those thoughts resonated as you were making the comments about the office sector there, Max. But I do thank you very much for your insights and your comments this morning.

Max Swango:

Oh, thank you for having me. I've enjoyed it.

Paul O'Connor:

And to the listeners, again, thank you for joining us on another installment of the Netwealth Portfolio Construction podcast. And I hope you very much enjoyed the discussion that I've had with Max this morning on direct global property investing and the opportunities to add value in a diversified portfolio. And I look forward to you joining us on the next installment of the podcast series.