Own the assets, and a share of the business behind them

When we assess an investment opportunity, we start with what drives the income. This approach has served us very well over nearly 20 years. 'Look after the income and the capital will take care of itself' I still recall the words of Howard Brenchley, ASA's Responsible Entity's independent chair and one of the pioneers of investing in securitised real assets in Australia.

In the search for sustainable income, the sectors that often interest us most are alternative or less mainstream sectors where the fundamentals of underlying occupier demand and clean cash flow are key value drivers. This has been a particularly profitable approach considering things like industrial real estate, healthcare assets and self storage. Each of these sectors started with yields of 8% or more before being 'discovered' and then re-priced by the market.

We see considerable parallels with our new social infrastructure investment strategy.

While income is critical, the headline yield is only part of that picture: it tells you what you will be paid if everything goes to plan. It says nothing about where the income comes from, or what has to keep working for it to arrive.

Looking under the hood of one's tenant or the operator here is critical - particularly in less well-established sectors. Looking under the hood is essential to forming a view on both the business's ability to withstand changes in its operating environment and to continue to pay the rent. It is also key to assessing the likelihood of finding an alternate tenant should the need arise - to continue to generate the rental income from the asset.

Things also change over time - the hospital sector was a great sector for a considerable period of time however valuations increased substantially, the sector in private equity hands took on significant debt and it has ended in more than a few tears subsequently. This is a great illustration of the value in seeking to understand the strength of your tenant.

However, one of the great things about investing in real assets that provide strong social utility (ie are in actual need from their underlying users) is that you get the backing of the real assets and the ability to lease those assets to a tenant which has physical value and the ability to generate income. Real assets are often distinguishable from equities which are typically much more dependent upon factors such as sales revenues and trading conditions (consider owning a building leased to a greengrocer) - the rent is paid regardless whereas the greengrocer's profits are their sales after all of their costs (including rent).

In the past, investors have usually had to choose between the real estate and the business, or pay for goodwill and a business multiple to get both.

One of the key advantages of the approach we have taken with the ASA Equal Living Social Infrastructure Fund is that investors will own they physical real assets, but will also have the opportunity to participate in the potential equity upside of the tenant and operator. The fund owns purpose-built accommodation and care assets in metropolitan Melbourne, leased long term to the operator, Equal Living Group. It also has an equity interest in Equal Living, which comes from funding the business's growth. If the operator does well, the fund shares in that as well as the lease income.

We have seen what scale does to a fragmented sector. There is a distinct parallel with healthcare real estate coming out of the global financial crisis, which had few buyers and went on to be a very profitable investment. National Storage listed in 2013 on a capitalisation rate of 9.7% and was taken private this year by Brookfield and GIC at 5.87%. Social infrastructure is still made up of small operators with no institutional owner of scale, which is where the opportunity sits.

Despite the negative headlines the NDIS attracts, the scheme was designed at its core to provide critical support and essential accommodation for vulnerable members of the community, and this part of it does that very cost effectively for government. Specialist disability accommodation accounted for $452 million of a $45.9 billion NDIS budget in FY25, less than 1% of the total, while the alternative for most residents is a public hospital bed that costs government up to three times as much per night.

None of that removes the need for careful due diligence. The questions we asked ourselves are the ones I would put to any manager offering unlisted real assets.

Start with who carries the occupancy risk. Our three assets are 100% leased to Equal Living Group, so the fund's income does not depend on whether a particular apartment is filled. That risk sits with the operator, which breaks even at around 56% underlying occupancy.

That leads to the harder question, that with a single operator, how much risk is there?

The fund relies on Equal Living continuing to run its business well. It is why the fund is entitled to nominate a director to the Equal Living board, why all significant decisions need both parties to agree, and why ASA Real Estate Partners and Equal Living Group are co-investing up to 10% of the equity alongside investors.