While real estate investing is often associated with buying apartments and retail and office buildings, some of the most successful mutual fund and private equity fund investment managers are shunning those properties to exploit the growing critical need for industrial, warehouse and lifestyle-type centers that are in increasing demand both in the U.S. and abroad.
The strategy is paying off big for the Altegris/AACA Opportunistic Real Estate mutual fund, which was ranked in the top 1% of its real estate category over the past three years, returning an average of 10.9% a year, according to Morningstar.
The fund’s success comes from its strategy of eschewing conventional real estate developments in favor of “opportunistic real estate,” said Miguel Sosa, a portfolio strategist of research and investment solutions at the firm, speaking at Financial Advisor’s 9th Annual Inside Alternatives Conference in Las Vegas last week.
Sosa favors real estate in growing segments of the economy that simply can’t move. As a result, he invests in properties such as casinos, lab space, cell phone towers and even hydroelectric dams. The strategy has allowed the fund to generate 300 basis points of alpha since it was launched.
Sosa scours the globe for companies that meet his model and is a fan of data and gaming centers in China, where not only does the government consume vast amounts of data because of its surveillance of every one of its plugged-in citizens, but where there is an exploding middle class that loves to gamble.
“We like casinos with strong business models,” Sosa added. “The high cost of building a casino locks the business to its location, keeps the riffraff out and for every dollar that enters a casino, the gambler leaves with 78 cents,” he said.
Just as important is that gambling accounts for only about half of revenues at casinos—lodging, dining, entertainment and conventions account for the other half of the equation, according to Sosa.
Altegris owns three of the four largest U.S. players, including MGM Resorts International, Las Vegas Sands and Wynn Resorts. Wynn especially has a stellar management team and its courting of the luxury market has really paid off, with third-quarter revenue gains last year of some 45%, Sosa said.
The fact that two of four Wynn properties are in Macau, China, where the gambling market is six times the size of the Las Vegas market, is another draw for Altegris. Macau is positioned to attract even more visitors with the completion this year of the bridge linking it to Hong Kong and Zhuhai, China. The average Chinese consumer gambles roughly 20 times as much money as the average American, Sosa said.
Other real estate funds such as Black Creek Capital are cashing in on the boom in online retail and the growing need for Amazon, Walmart and Whole Foods to lease warehouse space for their growing delivery businesses. “From our perspective, we see a lot of opportunity in the shift in the way consumers buy and receive goods,” said Scott Recknor, Black Creek’s managing director and head of asset management. “Industrial is where we think the puck is headed as the demand for one- to two-day delivery escalates and rental rates increase.