Australia's multi-family opportunity

It’s only a matter of time for Australia to follow suite, is the view of AXA Investment Managers when looking at certain areas of our local property market.

From France, AXA runs ruler over one of the largest portfolios of real estate in the world. The asset manager is acutely aware of structural shifts, and the transition from traditional to more alternative assets.

After acquiring major player Quadrant last year, AXA now has a stronghold of the US commercial mortgage loan market. That purchase nearly doubled AXA’s loan portfolio, catapulting the figure over the $20 billion-mark. Add the infrastructure financing division, and AXA’s total loan portfolio is around $30 billion.

Isabelle Scemama, the CEO of AXA IM Real Assets, spoke to Eureka Report about what they are seeing in the Australian market in particular. Scemama's expertise comes from many years at the helm of the number one portfolio and asset manager in Europe for direct property.

The asset manager expects returns from Australian commercial real estate to slide from 12.5 per cent per annum in 2015-2017 to 6 per cent between 2019-2021.

“Globally, property markets are in the mature stage of the occupancy cycle, and the driver of returns has shifted from yield compression to underlying income and rental value growth,” says Scemama.

Winners and losers

With the headline rate of return more than halving, Scemema is calling for greater awareness of the new driver of returns. She highlights the need for asset managers to take a “boots on the ground” approach to mitigate vintage risk and obsolescence in buildings, and a focus on sustainability to generate returns (building and construction accounts for 39 per cent of energy-related CO2).

Scemama tells the story of the retail sector feeling the effects of the ecommerce boom and giving rise to the logistics sector. She is part of the chorus tipping that an onslaught of retail property will soon come onto the market, putting more downward pressure on returns.

“It's a question of selectivity, but what we can see looking at our global portfolio across continents is that the very well located shopping centres, the ones that benefit from much stronger footfall, continue to perform well and generally have very good carry,” says Scemama.

“When you look at the very big brands, international ones, they cannot maintain equal presence everywhere, so it is a question of selectivity there. Assets that can be repositioned offering more of a leisure component will continue to perform, and if you’re able to enter the market because you take advantage of the retail bashing that is going on everywhere, it can be an opportunity.

“My very strong conviction is that it is not the end of the physical shopping. But you will have also a lot of losers, that’s for sure.”

The multi-family opportunity

Industrial pipping retail is a secular trend, believes Scemama.

Turning to other long-term thematics, AXA has been focusing on ‘alternative’ asset classes in the property sector, including multi-family, aged care and student accommodation, which represented 40 per cent of its investment last year.

Scemama classifies these sectors as defensive and broadly believes residential is more defensive than commercial because it’s less correlated with GDP. She’s actively targeting sectors less aligned to the business cycle. 

Drilling deeper, Scemama claims multi-family residential is the emerging investment opportunity here in Australia.

Multi-family is the build-to-rent apartment sector. Institutional investors fund the sector, and developers retain and rent out the stock. Slotting into the defensive asset mix, returns are historically low and stable at around 4-5 per cent, suited to a long-term institutional investor.

Right now there's a pipeline of about 4600 apartments being developed into this sector in Australia, based on recent data from Ernst & Young.

Scemama thinks the eventual growth of this sector is only a matter of time. Here in Australia, superannuation funds have been proposed as getting a piece of the pie.

“What we call the multi-family, it is not a mature market at all in Australia, but what we observe everywhere is there is less and less owner-occupiers because the younger generation wants to move,” says Scemama.

“They want more flexibility and compared to their parents they are less keen to purchase a property, and are looking for rental homes.”

She’s basing this on demographic data, as well as shifts seen in the US and UK.

According to CBRE, institutional investors held around 17 per cent of all apartment rental stock in the US in 2017, despite the multi-family sector only getting off the ground around 20 years ago.

However, new laws in Australia may put the brakes on build-to-rent. From July 1, the withholding tax rate will double from 15 per cent to 30 per cent on managed investment trust fund payments to foreign investors for what has been tabbed under residential housing income.

If elected earlier this month, Labor proposed to override this, but it was a pre-election item largely lost in its sweeping property reforms around negative gearing and capital gains tax.

Scemama says right now is a “good access point” into the build-to-rent sector.

“I am sure and convinced that this sector will definitely emerge in Australia,” she reiterates.

“And what we see in the more mature markets for residential, for the multi-family, there has been a premium that exists to get access to this asset class and it is evaporating more or less completely, and so it is also a good access point.”