Are other superannuation schemes going to follow AustraliaSuper and invest globally? Keith Power reports
In June, Australia’s largest superannuation fund, AustralianSuper, appointed TIAA Henderson Real Estate (TH Real Estate) as investment manager for its emerging central London office property investment strategy. The mandate follows the appointment of TH Real Estate as investment manager in 2013 by AustralianSuper for its entry into the UK shopping-centre market.
“This [new] mandate is an ideal fit for AustralianSuper,” head of property Jack McGougan said at the time. “The UK offic e market – central London in particular – sits well with our investment approach. It has a record of strong returns over the long term, transparency, good liquidity and a positive overall economic outlook, among a range of attributes.”
According to TH Real Estate, AustralianSuper is committed to expand its global property investment portfolio significantly over the next five years. In January, the institution partnered with The BT Pension Scheme to purchase a 50% interest in regional shopping mall thecentre:mk in Milton Keynes, north of London. The deal was AustralianSuper’s first direct investment for its international property portfolio.
In July, AustralianSuper also awarded two new residential property mandates to ISPT and QIC. According to McGougan, the two mandates will enable the fund to pursue a residential investment strategy, a move in keeping with AustralianSuper’s broader long-term approach to direct property investing.
“We’ve been researching the sector for a long time and we see good long-term opportunities for maximising returns to our members,” McGougan said. “The housing sector is such a key component of the broader economy. It is, after all, Australia’s largest investment class and in it we see real potential for executing an effective long-term strategy.”
But what are the chances of more superannuation funds following the example set by AustralianSuper?
Nick Evans, head of Australia for TH Real Estate, believes there is further appetite for funds to go offshore, considering that the domestic market is fairly constrained. To diversify portfolios they will need to continue to explore relationships outside of Australia.
“Partnerships are still the favoured route with larger schemes in Australia and elsewhere,” he says. “The pooled concept seems to be more attractive to those investors that don’t have the internal resources to structure those partnerships and make decisions on an ongoing basis.”
Evans thinks real estate is very much a key asset class for Australian superannuation funds, that property will continue to be a part of their portfolios and that they are predominantly investing in unlisted property for diversification benefits.
“There’s usually an allocation to listed investments, but that can be for a number of reasons,” he says. “It can be liquidity and it can be access to certain markets or particular niche investment strategies or management teams.”
Steve Williams, executive managing director at Real Capital Analytics, who had 30 meetings with superannuation funds earlier in the year, predicts a gradual move to global real estate investing rather than a swift, wholesale change.
The pressure to invest abroad is very real due to a growing capital base and a limited domestic property market. But Williams says global diversification will involve a shift in strategy, identifying partners and having global investment departments that know what they are doing. “You have to know the tax regime of the country you’re investing in,” he says. “[This] points to having a fairly sophisticated investment team if you’re going down the global road.”
The Retail Employees Superannuation Trust (REST) is among Australia’s largest superannuation funds by membership. According to its general manager investments, Jo Townsend, REST is a “growing fund” and aims to be a “buy-and-hold” investor of properties.
“Property is a key asset class used to diversify sources of risk and improve risk-adjusted returns,” she says. “The idea of investing in a range of asset classes, such as property, is to minimise the over-reliance on a particular type of investment to generate long-term returns.
“We aim to build a portfolio of quality properties that exhibits defensive characteristics in terms of experiencing a moderate level of volatility in capital value, but which generates a stable income yield and a moderate level of capital growth over the long term,” Townsend says.
“We will also look for properties that have inflation indexation built into rental agreements. This means that the rental income increases to account for inflation. As a result, these assets provide some protection of members’ investments against inflation.”
Townsend adds that REST invests in properties that are held directly (unlisted properties) or in pooled vehicles, and that property is approximately 8% of REST’s total assets under management.
“At the moment over 90% of our allocation to property is in Australia,” she says. “Quality property assets to add to our portfolio do not appear on a regular basis, and competition is strong when they do.
“Given REST’s size and growth, we are also actively looking for opportunities to invest in property globally to grow our allocation over time. In addition to domestic opportunities, we are looking in developed markets such as the US and Europe.”
According to Townsend, one of the key risks in real estate investment is the general illiquidity of directly held property. Consequently, the level of property holdings in a portfolio needs to be considered in relation to the liquidity requirement of the portfolio. This, she says, is driven by the expected level of future cash inflows and outflow.
“We ensure that our portfolio liquidity is appropriate in various ‘stress testing’ scenarios to accommodate an appropriate level of property holdings such that we can buy and hold to realise value over the long term,” Townsend says.
“We also think about concentration of risk to a particular tenant and how we could minimise that risk. There is also lease expiry risk (multiple tenant leases expiring at similar dates), development or refurbishment risk, changes in technology, currency exchange rates and levels of leverage that need to be considered from a risk perspective.
“Foreign currency exposure of global property investments can have a significant influence on a property portfolio. The level of currency fluctuation can easily wipe out the income or capital growth from a property over a year. Therefore, it is important to hedge against such currency risk to ensure that the primary objective of stable income and moderate capital growth derived from property investment can be realised.”