Paul Clark spent over a decade as CIO of Crown Estate in the UK before joining AustralianSuper just over a year ago. The new job didn’t require a long-haul move from London to Melbourne, but rather a 30-minute walk from the heart of the West End to King’s Cross.
The Crown Estate, whose origins date back to 1760 and whose profits go directly to the UK Treasury, is a very different beast from Australian-Super, Australia’s largest superannuation fund, which invests on behalf of 2.5 million members.
But they share parallels when it comes to London; both have an interest in the very fabric of the city. The Crown Estate owns much of the West End, centered mostly in and around Regent Street. AustralianSuper is the biggest investor in the 67-acre King’s Cross redevelopment, which has transformed the area around one of the city’s biggest rail terminals.
Clark’s 13 years at the Crown Estate, during which the central London portfolio underwent significant investment and modernization, meant he was immersed in the world of mixed-use ownership and place-making – two concepts that have become key to urbanization and regeneration strategies. The transformation of the King’s Cross area, led by developer Argent and property fund manager Hermes Investment Management, is probably one of the clearest examples of putting these concepts into practice.
AustralianSuper joined the business in 2016, taking a 25% stake in King’s Cross Central Limited Partnership. Today he owns nearly 70% and the investment represents a significant, but unique, exposure to the UK property market.
● Total assets of A$254 billion
● Direct real estate and infrastructure asset allocations (balanced option): 5.1% and 12%, respectively
● The investment in King’s Cross, London, is the largest asset by value in the property portfolio
It’s no secret that AustralianSuper has deep pockets – it has over A$250bn (€158bn) in assets and these are likely to rise – and thus the burning question for the London and UK property industry is what will he do next?
The same year AustralianSuper made its initial investment in King’s Cross, it also opened an office in London – not specifically to manage property but for private markets more broadly. While the London office has grown from around 30 people when Clark joined to 50 today, the property team only represents around a tenth of the London staff.
“If we had had this conversation a year ago,” says Clark, “you would have had the privilege of speaking to the entire European real estate investment team at AustralianSuper. The real estate team in London currently numbers five people, but will grow over the coming months and years or so.
The organization is clearly easing up for a bigger foray into the market. But what form will that take – new large-scale investment in the vein of King’s Cross, or more diversified expansion? All signs point to the first.
“The approach we have within the real estate portfolio is to focus more thematically on how we see the markets developing,” says Clark. “Therefore, at the top of the strategy, there are three themes that we are looking to leverage.” These themes are demography, digitization and placemaking – or, to use AustralianSuper’s antipode nomenclature, “precincts”.
Clark continues, “From that starting point, we then look at the markets we want to be in and how we want to access them. And for the London team, this high-level strategy is broken down into two main areas of activity. The first is in-town, mixed-use investment and development, which allows us to capitalize on the experience of King’s Cross.
“We have identified a small number of cities where we would like to focus our efforts, where we believe the markets are deep, liquid and transparent enough to invest and operate at our scale, and also where we like medium-long-long-dynamic long-term occupational supply and demand.
London is “number one on this list”, so it seems that further investment in the capital is the safest bet to predict the fund’s next move.
Clark doesn’t elaborate on other European cities on the AustralianSuper agenda, but when pressed he says: “We love Berlin too. Now Berlin is more expensive than London if you buy permanent assets, but what we love about Berlin [is] as the seat of government and one of Europe’s major cities, it attracts a wide range of users.
He adds: “You see that people want to live there, they want to work there, they want to go out. And it’s still a city catching up to where it should and could be. So it’s a city, for example, where we would like to spend time thinking about the opportunities it offers.
City center mixed-use regeneration projects allow you “to be flexible about which areas you want to focus on”, although by and large they will be led by either offices or residences, explains Clark. And, most importantly, he’s positive about the future of the office – or, at least, “grade A, top-notch, well-located offices”.
He says: “We see the likelihood that there will be a fork and there are real challenges for the office sector. But, for example, where we sit at King’s Cross, we have, for all intents and purposes, no vacuum at present, and [estimated rental values] have held up well over the past 18 months or so. And we’re seeing occupants continue to be drawn to good locations with high levels of amenities and in buildings that can offer the flexibility and features that work for their staff.
But what about the disruption caused by COVID-19 and the increase in working from home? Doesn’t this place big question marks on the future of the office and urbanization in general?
“The approach we have within the real estate portfolio is to focus more thematically” – Paul Clark
“My personal view, at least, is that I don’t see the events of the past two years as dissecting 3,000 years of human history,” Clark says. “Successful cities are centrifugal forces, and they are also incredibly efficient. The bigger a city gets, the less carbon each person consumes there and the less facilities you need per person, because you actually get economies of scale.
He adds: “We have to accept that it may change the pattern of urbanization, but I don’t think it will change the fact. And I’ve also never been convinced by the satellite office suburbanization argument that, for example, occupiers might prefer to have more satellite offices, located around cities.
“The reasons almost everyone will give you for returning to the office are cultural and revolve around innovation and collaboration. And you can’t do that if, for example, in London, you have all the middle-aged guys like me sitting in a satellite office in west London, because we all live there, and the 30-somethings and less all in a satellite office in east London. You need everyone to come together.
While the focus has been on the effects of COVID-19 and working from home on the office sector, “the biggest long-term issue that needs to be addressed is zero carbon,” Clark says. “We will adapt to COVID over time and I have no doubt this will change travel habits and work practices. [but] what is probably not sufficiently taken into account at the moment – certainly for more secondary office buildings – will be the cost of compliance with the zero carbon agenda, which is going to come to us quickly now.
During the week of COP26, the King’s Cross Estate announced that it had become carbon neutral. This was achieved in part by switching to 100% renewable energy sources and green tariffs. But it also took retrospective action, offsetting 100% of its past embodied and operational emissions by purchasing 338 hectares of pasture on which more than 600,000 trees will be planted. The new forests will be able to remove around 153,000 tonnes of CO₂ equivalent from the atmosphere over the next 60 years.
Asked how he thinks the net zero agenda will actually play out in the office sector, Clark replies, “Overall, you shouldn’t invest in an asset unless you can see a path down. zero carbon.
There is another potential growth area for AustralianSuper in Europe: logistics. Clark is quick to point out that he has “some concerns about entry prices, especially for permanent assets.” The sector has certainly seen a huge influx of capital and yield compression in recent years. “So most likely we will think more about development in that space if we get into it,” he says.
“I have no doubt that the tectonic plates, which have been moving for a few years, will continue to drift in favor of this market, from the point of view of the strength of professional demand in this sector. But that, for now, seems very fully priced in by current yields. Therefore, it’s hard to see how you can get sufficiently attractive risk-adjusted returns from a large number of permanent assets in mature Western European markets.
This would involve relying on Australian-Super’s inland logistics exposure. In October, it invested alongside a consortium led by Logos to buy industrial land adjacent to Sydney Airport from airline Qantas.
“If we do something in UK logistics it will probably look a bit like this, in terms of scale and what we aspire to do,” Clark says. “[But] in the shorter term, you should expect us to focus on this inner-city mixed-use piece, initially focused on London.