08 July 2014
AustralianSuper’s recent moves to nail down mandates for investing in European real estate are a sign of things to come, as more Australian pension funds develop the capability to put money to work in overseas property.
One of the main motives is that the Australian market for core real estate has a shortage of offerings for major investors.
Australian investors could potentially pump US$75 billion in capital into offshore property by 2020, according to Jones Lang LaSalle research. By 2020, superfunds would theoretically be able to buy up almost the entire commercial investment market in Australia, JLL figures show. That is forcing them to diversify internationally.
There is plenty of caution after some of the first efforts at international diversification failed in the wake of the global financial crisis. Australian real-estate investment trusts and superfunds became the biggest investors globally outside their home market in 2005 and 2006, spending more than US$12 billion a year. But they retreated rapidly in subsequent years as the financial crisis hammered the price of many of the assets they acquired.
As a result of their previous experience, superfunds are now seeking out mandates or investment partnerships with global fund managers that have a strength in a particular market. They are looking to identify the best managers by nation or property type.
“It’s a good, sound customer strategy to select best-in-breed fund managers at the country level or asset level,” Talbot says.
AustralianSuper engaged Henderson Global Investors last year for a U.K. retail real-estate mandate. The fund had previously been investing mainly in co-mingled funds but decided it had reached the point where it could invest directly into real estate. That led to the fund making its first direct offshore investment, buying a 50 percent stake in a Milton Keynes shopping mall, The Centre:MK, for US$494 million.
It has now also awarded mandates to manage a central London office property investment to TIAA Henderson Real Estate, a new joint venture between TIAA-CREF and Henderson Global Investors. That entity, known as TH Real Estate, has also assumed responsibility for the U.K. retail mandate.
Most recently, at the end of June, AustralianSuper awarded a mandate for office buildings and shopping malls in continental Europe to London-based Rockspring Property Investment Managers.
The superfund’s aim is to raise its asset allocation to real estate to 10 percent of total assets. AustralianSuper is Australia’s largest superannuation fund, with A$75 billion (US$71 billion) in assets under management.
It currently has A$6 billion invested in property, but the fund continues to grow in size as well, making it important for the fund to identify large-ticket investments.
“What we are doing is building capability now,” Jack McGougan, the head of property at AustralianSuper, says. “One of the challenges for some groups is that all the mandates we have are nondiscretionary. We are an active owner – we maintain all the decision-making capability on buying and major leases. That doesn’t appeal to some managers.”
It is one of the few pension funds that have developed the capability and scope to invest overseas. The Queensland government’s superannuation fund QSuper, the Queensland investment fund QIC, and the REST Industry Super, which represents retail employees, are probably the only superfunds with that kind of capability.
“You can count them on the fingers of one hand,” Talbot says. AustralianSuper has in fact teamed up with QIC in the United States, asking QIC to identify retail investments there.
QSuper invested directly last year when it bought the London office tower 33 St. Mary Axe for £82.5 million (US$142 million) from J.P. Morgan Asset Management.
The Australian superannuation fund industry has an estimated A$1.8 trillion (US$1.7 trillion) in assets under management, according to the Association of Superannuation Funds. That makes it the fourth-largest pension-fund system in the world.
It is only going to grow bigger, given Australia’s requirement of paying 9.5 percent of all salaries into a superfund, a figure that will increase to 12 percent by 2020.