Australia’s $1.4 Trillion Pension Funds Chase Property Assets

Australia’s $1.4 Trillion Pension Funds Chase Property Assets
Commercial buildings, including the Westfield Group shopping center, left, and the Sydney Tower, center, in Sydney. About A$1.4 billion of transactions involving commercial properties priced at more than A$20 million each took place in the first quarter of 2012. Photographer: Brendon Thorne/Bloomberg

Australian pension funds, managers of about $1.4 trillion in assets, plan a property buying binge that may drive up prices, as new laws force employers to increase contributions to retirement savings programs.

Construction and Building Union Super and AustralianSuper plan to double investments in offices, malls and retirement villages, seeking income-producing assets that have potential to rise in value. Industry Superannuation Property Trust, the property-investment manager of A$7.5 billion ($7.5 billion) owned by 23 pension funds, expanded assets under management 16.7 percent since 2010 as clients reinvested returns.

Superannuation funds, as the managers of the world’s fourth-biggest pension pool are known, will almost double to A$35 billion their investments in privately owned property over the next two years, said Martin Lamb, Sydney-based director for Asia-Pacific real estate at Russell Investments. That will exacerbate a scarcity of prime real estate, raising prices, compressing yields, and eventually sapping returns.

“We are poised for the highest ever new amount of super capital to be allocated to private property over the next two years,” Lamb, who helps oversee $140.8 billion, said in an interview. Investors will benefit as the new capital pushes values higher, Lamb said, though “supers will be faced with the prospect of diluting their returns as they chase assets.”

Pension savings are compulsory for workers in Australia, with the government-mandated employer contribution to superannuation payments set to increase to 12 percent of wages by July 2019, from 9 percent now.


Pension funds invested an average 7 percent of capital in unlisted property and 3 percent in listed property in the year ended June 30, according to data from the Australian Prudential Regulatory Authority. Local shares made up 29 percent, international shares 24 percent and domestic bonds 10 percent.

Local pensions’ median balanced option -- the default for as much as 80 percent of Australians -- lost 1.87 percent in the 2011 calendar year, as stocks were roiled by Europe’s debt crisis, according to pension-fund research company Super Ratings. Direct commercial property, in contrast, had a total return of 10.5 percent, according to real estate researcher Investment Property Databank Ltd.

AustralianSuper, an industry pension fund with 1.8 million members, plans to consider farmland, timberland and retirement properties as part of an allocation to alternative investments, in addition to commercial property, as it doubles its real estate holdings to about A$8 billion by 2016, Elana Rubin, chairwoman of the fund, said at a conference in March.

Rental Income

“We’ll be shifting more to core real estate property and away from opportunistic investing,” she said. “We’re going to increase our weighting to core real estate by focusing on properties where a substantial part of the return to investors is underwritten by secure and sustainable rental income.”

A fifth of the fund’s property could be overseas in five years, primarily in Europe and North America, from less than 10 percent now, said Jack McGougan, head of property at the pension.

“We’re trying to preempt the fact that if we double our size, there’s going to be fewer domestic opportunities to access the high-quality properties that we’re looking for,” he said.

While Australia has benefited from demand for resources from China and India, it has also experienced five straight quarters of home price declines, contraction in services and manufacturing, and slower-than-expected economic growth. The central bank reduced its benchmark interest rate by half a percentage point this month, the deepest cut in three years.

More Deals

Limited supply of office buildings will raise rents in Australia by 3.8 percent and values by 3 percent by 2016, Jones Lang LaSalle Inc. figures show. Industrial property rents will add 3.2 percent and values 4.1 percent, while retail rents will climb 3.3 percent and values 3.6 percent, the Chicago-based broker said.

About A$1.4 billion of transactions involving commercial properties priced at more than A$20 million each took place in the first quarter of 2012, higher than comparable periods in the past three years, property broker CBRE Group Inc., based in Los Angeles, said in March.

Institutional investors are willing to accept lower returns for prime properties to mitigate global risks, Rob Sewell, regional director for institutional property at CBRE, said in a February report.

Industry Superannuation Property Trust has boosted funds under management to A$7.5 billion in 2012 as clients reinvested proceeds rather than withdrawing them, said Chief Executive Officer Daryl Browning.

Domestic Bias

Local pension funds will boost their real estate allocations to 10.5 percent of total funds over the next two years, according to a report by Russell based on a survey of institutional investors it conducted with two industry bodies. Almost 97 percent of investments will go into domestic real estate at a time the supply of prime property is forecast to grow by 2 percent to 3 percent a year, it said.

“The prospect exists that a substantial amount of domestic capital is on course to chase a largely static set of property assets,” according to the October report.

CBUS, the largest building industry pension fund, expects to double its property investment to A$5.2 billion in five years from A$2.6 billion now while keeping its real estate allocation at 14 percent, according to Trish Donohue, executive manager for investments. It will seek investments in development projects through its subsidiary CBUS Property, and in prime commercial property, she said.

“Property gives you a combination of capital return and income-returning assets,” she said.

Replacing Banks

Pension investment manager Queensland Investment Corp., which oversees A$8.6 billion of property, will invest A$2.5 billion over the next five to seven years in developments, managing director Robert Carter said in an e-mailed response to questions.

“We might see new buildings being developed, which might be funded with superfund money, rather than bank debt,” CBRE’s Sewell predicted. “The other shift will be super funds investing in property debt.”

Sydney-based AMP Capital, a unit of asset manager AMP Ltd., will buy more offices and warehouses for some of its funds, driven by “reasonably attractive entry levels,” according to Debbie Alliston, head of portfolio management.

AMP Capital, whose diversified funds manage about A$60 billion, primarily in pension money, is also investing A$190 million in real estate debt for Axa Life, the pensions unit of Axa Asia Pacific Holdings Ltd., which AMP bought from French insurer Axa SA. It plans to expand its commercial loan pool to as much as A$500 million with contributions from pension funds by May 2013, according to Linda Cunningham, chief manager for commercial lending at AMP Capital.

“There’s a lot of capital chasing prime property,” CBRE’s Sewell said. “You’re going to see values rising for those assets. Some of these funds, to get these assets, to get that money invested, are going to be prepared to accept a lower return out of them.”

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