REST, one of Australia's largest super-annuation funds, is targeting new real estate investments as it searches for secure income streams. Richard Lowe speaks to CEO
Damian Hill about how he is finding little reason to look outside the domestic market
The REST Superannuation Fund is the largest of Australia's 65 industry-wide superannuation funds by membership, covering 1.9m retail employees in the country and with A$18bn (€12.8bn) of assets under management. It was established in 1998 and since then has built up a sizeable real estate exposure, currently standing at approximately 9% of total assets, underweight its strategic weighting of 13%.
The superannuation fund initially built up its property exposure by investing in non-listed pooled vehicles focusing on the Australian market. In the late 1990s it established its own internal investment arm, which was initially set up to manage cash and fixed-income investments but was extended to real estate investments during the early part of the following decade. Today, its investment arm manages a portfolio of directly held assets and interests in non-listed funds; REST has some further holdings in real estate funds made directly.
REST's real estate portfolio is made up almost exclusively of Australian investments. But it does have some modest exposure to New Zealand, the US and the UK through holdings in global funds. Damian Hill, CEO at REST, explains that the superannuation fund is not limited to domestic investments but international investments do have to compete against all other investment opportunities. "We continue to research the opportunities, but none have become compelling at this stage," he says. "We certainly have no aversion to increasing the property weighting more globally, but it's got to stack up versus what we can get through other investment opportunities."
And the superannuation fund has an appetite for new real estate investments, as they fall into the bracket of "real assets with real income streams", which Hill says have become increasingly attractive against an uncertain and volatile economic backdrop. "Real estate is one of the areas where we think we can get such assets. Infrastructure would be another."
With this in mind, Hill sees the most compelling opportunities still arising in Australia, although he admits that earlier expectations of large volumes of assets coming to the market have since been moderated. The Australian economy maintained a relatively strong position during the global downturn and many of the country's real estate investment trusts were able to recapitalise, while other markets around the world were still working through difficulties. "In effect, we are measuring our returns against a benchmark of long-term bonds plus 3%," Hill says. "Obviously, with interest rates much lower around the world than in Australia, it is very hard to get equivalent returns from investing globally."
Hill is also concerned about the level of gearing seen in international strategies. "The volume of gearing that is generally embedded in them is much higher than in equivalent Australian vehicles," he says. "We are not averse to a certain level of leverage, but we think generally there was excess leverage and still think there is some way for that to work its way out."
When asked to list some lessons learned from the recent financial crisis, Hill repeats the importance of understanding the leverage in investment structures. He adds that the superannuation fund is looking for simplified structures, not just in terms of leverage but also relating to partial-ownership positions. "Things can get very complex very quickly," he says.
The other important lessons he points to are ensuring that greater provisions are put in place to protect investors and to understand the true nature and situations of fellow co-investors. "REST is a long-term investor: when we look at our demographic, the median age is about 27 years," he says. "There have been occasions when investors firmly believed they were long-term investors - until they weren't, until they came under sufficient stresses that they needed to draw on some of the liquidity. So understanding investor rights in those circumstances is very important as well."
For the reasons above, Hill is keen on club deals, where smaller numbers of like-minded investors invest together and often have more say on investment decisions than in traditional multi-investor pooled funds. "One of the things we would like to do is co-invest or work the club space where the investors providing the capital have some real teeth when making the decisions," he says.
Hill agrees that REST is looking to increase its control in its investments, but it wants to ensure there is an understanding of how like-minded fellow investors are. "One of the things we look to do is get involved early in deals and in commitments to funds to try to put in place very strong investor protections. After all, we are a long-term investor, not a trader in these things. And so we think the dynamic is such that the investors providing the capital are looking to make sure protection is there, because in some areas the behaviours were not in their favour."
The superannuation fund has made value-added and even opportunistic investments, but it is focusing on core. In direct investing it recently acquired an office building at 717 Bourke Street in Melbourne for A$240m. REST has historically focused on the office sector for direct deals, and has limited investment in the retail sector to indirect investments in funds. This is because of the potential conflict of interest in having a number of representatives from retail companies on its board. "From a conflict point of view it wouldn't be appropriate to be both the landlord and the tenant," Hill says. "Certainly, our greatest opportunity is generally in the office markets to invest directly."
Sustainability remains high on the agenda for landlords and tenants, given the political and social urgency in the country. REST routinely assesses its portfolio for improvements in this area. "We certainly try to understand from our managers how they've integrated sustainability," Hill says. "We spend quite some time looking at what we are doing from a sustainability point of view and we make sure we are putting in the appropriate equipment to understand waste disposal, water usage, etc, and what capital programmes need to be put in place to improve the sustainability of properties."