Chase is on for higher yields

AUSTRALIAN super funds and listed property trusts are expected to start migrating cash to offshore markets in the coming year as managers seek higher-yielding investments.

By InvestSMART · 5 Dec 2012

By InvestSMART ·
5 Dec 2012

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AUSTRALIAN super funds and listed property trusts are expected to start migrating cash to offshore markets in the coming year as managers seek higher-yielding investments.

But the outflow will be more targeted than in previous years and more likely to involve a joint venture partner, according to LaSalle Investment Management.

The regional head of research and strategy, Asia Pacific, at LaSalle Investment Management, Paul Guest said demand for core opportunities had not diminished over the past few years and it was only projected to grow as Asian pension, insurance and sovereign wealth funds expand their allocations to real estate.

LaSalle has about $US2 billion of office, retail, residential and hotel assets under management in Australia, with its two biggest being the Novotel Melbourne on Collins and Australia on Collins, valued at $204 million, 179 Elizabeth Street, and the Sofitel Wentworth hotel, Sydney.

"For certain investors the entry price is worthwhile given the quality of the income stream," Mr Guest said.

"This demand can also make value-add strategies attractive, by restoring quality income streams through active asset management."

Mr Guest said the weight of money in the country from superannuation funds was expected to force investors to look overseas.

He said he doubted it would be the same as the last boom when trusts all went offshore with mixed results, but said the low-interest-rate environment in Australia would force some funds to seek alternative, higher-yielding investments.

"I expect there to be more joint ventures undertaken with overseas investors, such as Goodman Group, for example, has done in Asia," Mr Guest said.

The associate director of research and strategy at LaSalle Investment Management, Alexandra Gray, said the changes in superannuation contributions would see more cash flow into the property sector.

Ms Gray added that the big Asian and US investment funds would increase competition in the region as they also chased higher-yielding assets.

She said in Australia, the best opportunities were in the repositioning of grade B offices in CBDs.

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Frequently Asked Questions about this Article…

Why are Australian super funds and listed property trusts expected to move cash to offshore markets?

LaSalle Investment Management says low interest rates in Australia are encouraging managers to seek higher-yielding investments offshore. With pressure from large pools of superannuation money, fund managers and listed property trusts are expected to target overseas markets where income returns can be stronger.

Will the expected offshore buying be the same as the last property boom when trusts flooded overseas?

No — LaSalle’s regional head of research and strategy, Paul Guest, expects the outflow to be more targeted this time. Rather than a mass rush offshore with mixed results, funds are likely to pursue selective opportunities and use structures designed to manage risk.

How will investors access offshore property opportunities — direct purchases or joint ventures?

According to LaSalle, many funds will favour joint ventures with overseas investors rather than going it alone. Paul Guest noted there will likely be more joint ventures — for example, arrangements like those Goodman Group has done in Asia — to share expertise and risk.

What types of property strategies are likely to attract investors chasing higher yields?

Demand for core (high-quality) assets remains strong, but LaSalle also highlights value-add strategies. Active asset management that restores or enhances income streams can make repositioning or upgrading assets attractive to yield-seeking investors.

How will competition change in the region as Asian and US funds chase higher-yielding assets?

LaSalle’s associate director Alexandra Gray says big Asian and US investment funds are increasing their allocations to real estate, which will heighten competition in the region as they pursue the same higher-yielding assets.

Which parts of the Australian property market does LaSalle see as the best opportunities?

LaSalle identifies repositioning grade B offices in CBDs as among the best opportunities in Australia — upgrading and re-leasing these buildings can improve income streams and appeal to investors focused on yield.

How much property does LaSalle Investment Management manage in Australia and what are its major assets?

LaSalle manages about US$2 billion of Australian office, retail, residential and hotel assets. The firm’s largest Australian holdings include the Novotel Melbourne on Collins (at 179 Elizabeth Street, valued at about US$204 million) and the Sofitel Wentworth hotel in Sydney, according to the article.

Will changes in superannuation contributions affect cash flow into the property sector?

Yes. Alexandra Gray from LaSalle says changes to superannuation contributions are expected to drive more cash into the property sector, increasing the pool of capital looking for property investments.