How are super funds approaching allocations to property?

Over the past year, many of Australia’s superannuation funds have re-evaluated their property sector exposures in response to the challenges posed by the rise of e-commerce and the decreasing demand for office spaces.

According to APRA’s data for the June quarter of 2023, super funds were holding some $173.7 billion in property, down from $179.6 billion in the prior corresponding period. By September 2023, this figure declined further to $169.7 million as funds trimmed their exposures.

However, the tides appear to be turning for the asset class, with the S&P/ASX 200 Real Estate Index experiencing an upward swing since October last year, returning 10 per cent year to date as of 17 June 2024.

Speaking to InvestorDaily, Andrew Fisher, head of investment strategy at Australian Retirement Trust (ART), said property still remains an interesting asset class to invest in due to the ability to be specific about it sector by sector and region by region.

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“You can go out to the index or you can say, ‘you know what, if I want residential exposure, the US residential market’s fantastic and the rest of the world’s not that good, so I’ll put all my residential there’. Or ‘retail shopping centres are good in Australia, let’s do all our retail shopping centres here’. Or ‘office is good in the US and Australia, let’s concentrate on office there’,” he said.

Fisher observed that numerous promising opportunities exist outside traditional benchmarks, such as medical offices, student housing, retirement living, self-storage, and holiday parks.

“There’s so many off-benchmark sectors. And I think the unique thing about property is all those off-benchmark sectors are actually, if anything, better inflation hedges than the traditional, which is really quite interesting if you compare that to say, infrastructure, where you really want to be quite core focused in an inflationary environment,” he said. 

Looking back at the property market over the past few years, he noted that some of ART’s options had extremely low exposure to office spaces during the corrections of 2022 and early 2023.

“Actually we’d rotated out of it a few years before and have been moving into more industrials, more inflation-sensitive areas [like] student housing, retirement living, areas where we thought there was like a demographic and an inflation tailwind,” he said.

This partly contributed to the fund experiencing a lesser downswing compared to many of its peers, with a key factor being the recognition of headwinds in the sector before the correction.

“To be honest, commercial property had a demographic headwind before COVID-19 came along. Work from home didn’t start with COVID-19, it just accelerated it. I mean, I was working in an office building where we had catered for 80 per cent capacity and had hot-desking, so it was already a thing, it just accelerated very rapidly with COVID-19,” Fisher said.

“Thinking about real estate, I suppose we can get some really good outcomes if you can focus on the demographic and the macro trends and get it right.”

Earlier this year, HESTA’s chief investment officer Sonya Sawtell-Rickson acknowledged that property has been through a “pretty tough environment” since 2020, with the US office sector experiencing double-digit year-on-year earnings declines, though some sectors, like retail, were already facing challenges prior to the pandemic.

“Australia is a little bit different. We have some markets that are performing really well. I think those assets that are really high quality, very sustainable, we’re still seeing strong support, and as in most cycles, you’re seeing second-tier assets more challenged, so I think we’re navigating that as appropriate,” she said at the Asia Pacific Financial and Innovation Symposium in April.

Despite the challenges, the fund maintains a reasonable holding in Australian property. However, she added that incrementally, its “excess dollar is going offshore in big, broader opportunities for the same value.”

Among its “unsurprising” property investments are data centres and healthcare assets, Sawtell-Rickson added.

The appeal of industrials

Joining her on the panel, John Pearce, chief investment officer at UniSuper, highlighted an opportunity in industrials, stating that “gains are to be made” for those prepared to take on a bit of risk.

In March, UniSuper announced a 50/50 joint venture with ISPT, acquiring a 280-hectare greenfield logistics development site located adjacent to the entrance to the new Western Sydney International Airport. It highlighted intentions to develop the site, with the initial stages aiming to deliver a super prime manufacturing, warehouse, and logistics estate spanning over 400,000 square meters of gross floor area (GFA) within the next seven years. The expected value upon completion is anticipated to exceed $3.9 billion.

“In terms of allocations, we recently announced a very significant investment in industrial land next to Western Sydney airport, which we’re really excited about,” Pearce said.

“It’s one of those things where, as a large super fund, we’re able to make a decision quickly, get our hands on what we believe is prime real estate for development of warehousing, logistics, manufacturing facilities […]

“If you’re prepared to take a bit of a risk, take development risk, we still think there’s gains to be made in industrial. But it’s not cheap.”

Previously, Rest also expressed its confidence in the industrial property sector, announcing a $1 billion partnership with global investment manager Barings at the tail end of 2023.

At the time, Andrew Lill, Rest’s chief investment officer, explained that industrials offered a crucial area of opportunity to provide long-term value to its nearly 2 million members. He noted that the Australian industrial property market has established itself as a promising growth area due to continued demand for facilities in this sector.

“The national average vacancy rate for industrial property in Australia is the lowest in the world and we expect rates to remain well below historical levels in most markets worldwide,” the CIO said.