Australia’s largest super fund AustralianSuper has flagged the possibility of freezing its property funds for up to two years in the event of a market crisis.
The AUD140bn (€86.58bn) Australian pension fund said, from mid-November, members will be prevented from investing more than 70% of their savings in its property portfolio option. This has been popular with members seeking high returns in recent years.
AustralianSuper has also changed its rules, giving it the right to freeze any attempts at withdrawing savings from the AUD1.7bn property option, switch to other funds or make new contributions into the option for a period of up to two years.
But, the fund said, a freeze will come into effect only in “exceptional circumstances in response to a market stress event” and members will be informed.
AustralianSuper’s group executive, Paul Schroder, said: “These changes are being made to manage risk and protect all members’ interests.
“The changes were developed following extensive member research which indicated a property option including liquidity protections would meet their needs.”
Schroder told IPE Real Assets that this was a prudent step designed to ensure all members could continue to exercise investment choice over the long term and in all market conditions.
“The fund is committed to the property option, but these changes were necessary to ensure other members are not disadvantaged in the event of a significant property market correction in the future,” he said.
AustralianSuper told members the rationale for the new policy was that direct property assets can’t be easily bought and sold at short notice.
“If the market experiences a stress event which causes lots of investors to sell property assets at the same time, or makes it more difficult for investors to finance transactions, we may not be able to find willing buyers at reasonable prices,” it said.
Having the ability to freeze the option provided a safeguard by allowing some time for the market to recover before selling property assets.
The fund drew on the experience of problems in the UK after the Brexit vote in 2016. AustralianSuper has its largest offshore direct property exposure in the UK.
After the European Union referendum, it said, a large number of property investors attempted to get out of the UK property market.
In response, seven UK retail investor property funds temporarily froze or suspended redemption requests.
“These funds represented about £16bn (€18.32bn) in value or around 60% of the UK retail property fund sector,” it said.
“The remaining UK property funds opted to let investors continue making redemption requests during the period of valuation uncertainty, which meant they often had to sell assets at deeply discounted rates.”
These forced sales had impacted both investors seeking to sell their assets and those who remained in the UK property funds. One such fund was forced to sell at a 15% discount to its pre-Brexit valuation.
Three months later, the market rebounded from the short-term impact of the Brexit vote.
AustralianSuper said it continues to have “a positive outlook” on direct property.