Does AustralianSuper’s recent mandate to invest in the UK mark the start of a wave of global investment by superannuation schemes? Keith Power reports
In June 2013, Australia’s largest superannuation fund, AustralianSuper, appointed Henderson Global Investors to manage investments in the UK retail sector on its behalf.
The mandate was part of a wider international investment programme intended to increase the size of AustraliaSuper’s global property portfolio over the next five years.
Henderson Global Investors, which manages institutional money across a number of asset classes, including real estate, launched a new Australian business last year. Nick Evans, head of indirect property, moved from London to Sydney to help support the venture as executive director. The AustraliaSuper mandate looks to have vindicated the decision.
According to Evans, the larger Australian institutional investors, which invariably have large pools of capital to deploy, are finding it very difficult to invest in real estate domestically. There are, therefore, two principal reasons for superannuation schemes to invest in foreign real estate: their domestic market is relatively small, in a global context; and a global exposure provides further diversification.
“The opportunities that can be sourced outside of Australia are four-fold what can be sourced inside of Australia,” Evans says. “If we were to collect all of the super funds together, we would have the fourth largest savings and investment pool in the world [a result of Australia’s compulsory superannuation guarantee] but a relatively small domestic market to invest into in Australia.”
He adds: “Superannuation schemes are being very selective with whom they partner, going forward. And I think there is a global trend, as well, among the larger schemes. They are looking to invest in Europe and the US, and increasingly want a partner that has a global platform.”
A historically high Australian dollar is also boosting the buying power of Australian investors. It is an added incentive to go offshore, albeit not the primary investment case. Meanwhile, some European markets are still perceived to be in distress; the potential for further pricing corrections could present opportunities, Evans says.
Quentin Shaw, director, Eureka Funds Management, which focuses on the alternative investment sector in Australia, says superannuation funds have traditionally been focused on domestic real estate market but are increasingly considering overseas investments. He believes the trend will gain momentum because of a number of factors, including limited domestic investment opportunities and a desire to achieve greater diversification. A third reason is that superannuation funds have been hiring specialist investment staff, a development that would support a more global approach.
Shaw says: “The amount of institutional real estate investment stock in Australia is relatively finite compared to the rapidly growing superannuation pool which is forecast to grow from AUD1.5trn (€1trn), currently, to AUD3.5trn by 2020. With real estate allocations generally sitting at 10%, there will be a growing weight of capital seeking a home.
“This capital is also competing with international investors that have been very active in recent years, as well as listed real estate investment trusts. For example, various estimates have capital available for investment in city central-business-district office markets outweighing the assets available for sale by a factor in the order of five times.”
However, not everyone is expecting an immediate wave of foreign real estate investment from Australia’s super funds. Samantha Steele, senior research analyst at global asset manager, Russell Investments, says she is still seeing a preference for domestic property among many of them. Many had invested abroad opportunistically in the past and lost money during the recent global financial crisis. Today they have retrenched to the domestic market.
Shaw says consolidation in Australia’s superannuation industry is resulting in a smaller number of larger funds more able to employ specialised real estate investment staff with the expertise to deal with international real estate fund managers. Their larger investment capacity also means these funds can invest in “meaningful lot sizes” and compete with large international pension funds and sovereign wealth funds.
“While this trend will be positive in delivering greater investment diversification for the members, international investment brings a unique set of risks,” he says. “Currency exchange rate risk, sovereign risk and the risks associated with the specific nuances of different real estate markets are but a few. This was no more clearly demonstrated by several Australian real estate investment groups expanding into overseas markets prior to the GFC.”
Hostplus highlights currency concerns
The real estate investments of Hostplus are mainly domestic, although the superannuation fund for the hospitality, tourism, recreation, sports and related industries does have some international property exposure.
It also has a general preference for unlisted assets; in the case of real estate, it focuses exclusively on the private markets.
With approximately one million members it is also one of Australia’s largest funds. “Hostplus is a AUD13bn fund,” says chief investment officer Sam Sicilia. “We have over AUD1bn, too, of net investable money coming in each year. We have a very young demographic [with an] average age under 30. This means we can look forward to longer time horizons.”
Sicilia adds: “So liquidity is not a problem and we have lots of cash flow. That’s why our preference is for unlisted assets over listed. When you don’t have a lot of liquidity, you need to keep most of your assets liquid. Therefore, you can’t invest as much in unlisted assets as you might otherwise like to. So whereas most institutions/superannuation funds invest in real estate, not all of them invest in unlisted real estate.”
He says this is one of the competitive advantages of real estate as an asset that is not really espoused. In Hostplus’ case, real estate accounts for 15% of its overall asset classes, split approximately 90/10 between domestic and international investments, with the latter set to increase.
“If you have unlisted real estate, you have the luxury of being able to apportion it between growth and defensive, and you apportion it depending on the type of property it is,” Sicilia says.
“For example, if you’re engaged in core property that has long-term tenure, AAA security, with government tenants, it is, in effect, a bond and quite defensive in character. If you’re engaged in development property or industrial property, which is quite cyclic, then, in essence, you have a growth asset. And for our 15%, nine of the 15 is defensive play because of the nature of the properties we hold.”
Last year the Australian Prudential Regulation Authority (APRA) released new draft prudential standards designed to significantly strengthen the superannuation system in line with other sectors it regulates. There are no specific regulations or governance issues in these standards regarding investment in real estate.
However, investing in overseas markets in all asset classes brings with it currency risk. Hostplus’ board has implemented a hedging policy for its investments denominated in overseas currencies, and its currency overlay manager has been tasked with managing currency exposure in line with this policy.
The only difference with foreign investments in unlisted property and infrastructure is that the investor does not know the exact timing of the drawdown, Sicilia says, making it hard to hedge. He adds that if you invest in some jurisdictions offshore – like the US – there is still a double-tax problem.
“There is no tax treaty and, in effect, you can be double-taxed on capital gains in property,” he says. “So you have to be very careful about the volume and quantity of entities you are invested alongside, so that you don’t have a dominant stake. And you have to be very careful about the type of vehicle and the jurisdiction of the vehicle that does the investing. It’s not insurmountable, but it’s a trap for the unwary.”
CareSuper focuses on core, domestic
With more than 269,000 members and AUD7.5bn in assets, CareSuper specialises in superannuation for those in professional, managerial, administrative and service occupations.
According to CareSuper’s CEO, Julie Lander, real estate currently accounts for 12% of the fund’s portfolio and this is almost entirely invested domestically. It is a key asset class and a diversifier. “Because it provides a return comprising a mix of capital growth and a relatively low level of valuation volatility, it is an important part; it creates a different sort of return profile.”
CareSuper invests only in non-listed real estate through a number of funds (see table 2) and focuses on existing, large-scale commercial property with relatively high and stable incomes.
“That suits us,” Lander says. “Our property is valued in a periodic process by valuers and it also returns yield from rents. When we’re talking about unlisted real estate, we’re looking at the actual derivation of the return, which is from capital growth and earned income. It’s that low level of valuation volatility and a lower correlation to equities and bonds. That’s really to our advantage.
“On the disadvantage side, it is not overly liquid and there are high transaction costs in the property sector, particularly stamp duty. So, for us it’s a long-term investment and that’s why we invest in unlisted property.”
While CareSuper’s approach may not be radically different to other superannuation funds, according to Lander, some include listed property in their portfolios. The other potential differentiator, she says, is CareSuper’s focus on core, rather than developmental, property.