Rebalancing by Australian superannuation funds has pushed secondary trading in domestic real estate funds to the best part of AUD1bn (€679m), according to industry sources.  

“I can count up to between AUD500m and AUD1bn of secondaries which were traded since the start of this year,” said one source, a significant investor in several core funds.

While only few of these actually came to the open market, there have been exceptions. One Asian investor is currently negotiating to buy a parcel valued at around AUD50m in an Australian wholesale fund, sources said.

Chris Chiang, a senior director with CBRE Capital Advisors, Asia Pacific, told IPE Real Estate: “We are starting to see an increase in activity in Australia, particularly with the core funds. Australian super funds have been quite active in disposing of holdings since the beginning of 2016.”

Chiang said the superannuation funds were “by no means distress sellers”. He explained: “Many of the investors are rebalancing their books and consolidating to a smaller pool of external managers.”

Chiang said Australia is still an attractive market for investors seeking core returns, and the secondary market is a faster and more cost-effective way to acquire large and diversified positions.

The most keenly sought-after secondaries are from Australia’s top 15 core wholesale funds listed under the Mercer/IPD Australia core wholesale property fund index. These funds collectively own assets worth AUD57.2bn.

Chiang said new investors prepared to meet the market have been successful in securing these (secondaries) holdings, and have seen favourable valuation outcomes since, given current market conditions.

“The long queues for the Australian core real estate funds have all but dried up through completion of transactions or because prior investors’ interest has fallen away,” he said.

“This gives new investors – particularly those offshore – a window of opportunity to gain exposure to a tightly held product.”

He believes the window is unlikely to remain open for long because Australian super funds are expected to return to investing towards the end of the year.

Australian super funds form the core investor base of these funds, and enjoy what is known as a ‘pre-emptive regime’ – in essence, an in-built protection of their rights and interests.

“So if you are in a fund, and somebody is selling his secondary units, you get a pro-rata opportunity to buy these secondaries,” an investor told IPE Real Estate.

“If there is any left over, the existing unitholders will have first crack at buying before the offer goes external. And even if it does go external, you may not hear about it because the manager has one or two external investors queued up ready to go, hoping that these units will make it through the pre-emptive,” he said

Another investor, who wished to remain anonymous, said: “If you are in a fund with strong performance and you know there is an external buyer queuing to get it, you can get a premium.

“We sold some units in a fund and got quite a material premium. Typically, the premium to net asset value is 1% to 3%.

“The bigger the premium the more likely the sale is likely to get past the pre-emptive because a lot of the people in the fund don’t want to buy units at a premium. We pay fair value and we won’t pay more.

“(But) if you are outside the fund and you want access, then you might have to pay a bit more. It is all about supply and demand.”

Most secondaries trade at their current unit price, which is a fair reflection of value, he added.

In Australia, most trades of secondaries range anywhere from AUD20m to AUD100m. A recent exception was a AUD150m trade among existing investors in the GPT Wholesale shopping centre fund.

The growth in activity in Australia mirrors the global market. “Since the start of 2016, we have transacted over US$1bn (€905m) in secondary trades globally,” said Chiang.

“Globally, around US$8bn in secondaries traded last year, mostly in the US, with large US pension funds either amalgamating, moving into direct property investment or reducing the number of external managers,” said Chiang.

He added that more funds-of-funds managers are expanding their investment strategy from fund investment to include co-investment and joint ventures.

“Buyers of these secondaries are mostly multi-managers, including Partners Group, Aberdeen and CBRE Global Investors,” he said.

 

Topics