Mirvac's great big plans

Greg Paramor's Mirvac group is strongly associated with apartment development in Australia, but in today's video interview the Mirvac boss reveals the US operations of the company could soon match the scale of operations in the home market.

Moreover, Paramor explains that the growing co-dependence between superannuation funds seeking higher returns and large scale developers could soon forge new alliances in the property industry.

In the US, leading superannuation funds have already taken over property companies in the search for above-average returns. Paramour does not rule out the same thing happening in Australia. Could private equity-fuelled predators '” currently restricting their targets to the industrial sector '” spread to LPTs? Paramour certainly thinks so.

The interview

Robert Gottliebsen: Greg, what is your view on the outlook for Australian residential real estate.

Greg Paramor: It differs around Australia and I think you need to go to the GDPs of each individual state to really get a guide for that. If you look at the two major exporting states at the present time '” Western Australia and Queensland, who are effectively in boom conditions '” they’re going very well. Western Australia is playing catch-up and because of the large amount of interstate migration; in particular, we’re seeing very strong performance across the board in Western Australia. It’s a little patchier in Queensland and it’s very much focused on other areas other than just Brisbane up the coast and places like Gladstone and Bundaberg where that services the mines as opposed to Brisbane.

Perth services the north-west and it’s a bit more spread out in Queensland. New South Wales, of course, is our weakest economy at the present time. It has the lowest GDP. In western Sydney we have a very poor market at the present time and there are a lot of reasons for that, which we can get into, but that’s the poorest performing market. The medium and high-density properties in Sydney and the high end of the market are going very well. We’ve just released one product of 130 apartments and basically sold them out in two weekends so it’s not a homogenous market. Victoria, similarly, quite a stabilised market and we’re actually starting to see some recovery in the Docklands and Southbank areas, which have been hard hit by oversupply, and the general housing market in Victoria is steady at this time, Robert.

Can western Sydney ever recover?

Yes, our numbers would suggest that western Sydney will. It’s got some infrastructure problems. New South Wales has been lagging in terms of planning its metropolitan [area]. I haven’t seen a decent strategy for New South Wales in the two-and-a-half decades that I’ve lived there and that indeed is a shame because it’s actually been sort of put on the back burner all the time by, particularly, the last Carr Government and nothing was really done to bring affordability into play. We pay about $140,000 per allotment in Government charges. Most people buying, therefore, are financing the Government of New South Wales through their mortgage repayments.

So you’re looking to buy more land?

We’re looking to buy land selectively throughout Australia. We’ve announced, even since our June results, we’ve acquired another 2500 lots of land either for medium-density or single dwellings. Those acquisitions have been in Western Australia and Queensland and shortly we’ll be announcing a major initiative in Victoria as well. In New South Wales, we will buy selectively. We’re more interested in the medium density side of the market because that’s a market we do particularly well in New South Wales. We are well served with the amount of housing lots we have in that market at this time.

Superannuation funds are now looking to invest with you in development land. Do you think this is going to grow rapidly?

The superannuation market in Australia as we know because 9% of each week’s earnings that all of us get goes into superannuation and neutral weight is about 10% into property, so that’s 12.6% is the growth in super. The investable universe broadly in Australia is about 6% for property, so we expect that to grow as the funds, even to maintain a neutral weighting of 10% to property, are looking for other opportunities in this space.

Will these joint venture investments underwrite your profit in future years?

We expect to see that in the future. We at Mirvac over the past 18 months have set a new platform. We’ve introduced a funds management platform, which is now about $8.2 billion in size. We see opportunities for us to offer our skills and our expertise to superannuation funds to coinvest with us so we see them as an alternate source of capital and alternatively us providing the expertise to give them an enhanced return from real estate.

Isn’t it a bit risky for the superannuation funds to buy developmental land?

Risk and return. You expect a higher rate of return for the risk you’re taking on any investment medium. Property, like any other investment, carries risks: market risks; all sorts of risk relevant to the particular investment you’re making. But the superannuation funds in Australia are very prudent. They are well serviced by competent trustees and executives these days; they look at their whole investment in property and they’re prepared to take a part of their investment in property up the risk curve to give them an overall total return slightly higher than if they were investing in core income producing office buildings or shopping centres.

Greg what will your American business look like in, say, three years?

Our US business is twofold. We have a large industrial portfolio in partnership with Centrepoint CALpers, currently based around Chicago. That will grow. That is sourcing its capital from Australia. Our other business in the US is Quadrant, which currently is involved in the property debt business, has 16 clients, all major institutions '” American institutions. We would expect that currently has around $3.5 billion of funds under its guidance or control to probably be three or four times larger than that in the next three or four years.

Could it be as big as Mirvac in Australia?

It could be. And in many ways we’d expect it to be given that America is 15 times larger than Australia by most measurements. So we could easily see that we can expand that business quite rapidly '¦ carefully, I might say '¦ but there is a lot of interest in that business. They have a well established track record. The people that we went into business with have been around for a long time in this space working for institutional America and as a consequence we’ve got terrific reach in that market.

So you’re looking to establish a global business?

Yes. Property has become global '” 25% of our investors in the Mirvac Group that own our securities come from overseas and that’s roughly half from the US and half from the UK / Europe. You’re now seeing a situation where Australian groups such as ours are expanding offshore. We’re seeing offshore people coming to Australia. Property has become a global play, just like the equities market and really bonds and fixed interest instruments.

Do you think the institutions could eventually buy the Mirvac business?

Well that’s pretty topical at the moment. We’ve just seen in the US Equity Office Fund a bid for EOF to be privatised, be taken out by a private equity fund. It’s not the first one to happen in the US, it’s probably about the sixth or seventh. Our partners there, Centrepoint, were taken private by CALpers earlier this year so we trade on a market. If people see our stock as under-valued or they wish to access our expertise and acquire the business, that’s why it’s traded on a market.

So the Australian super funds might move on you?

Well you never know. That’s an interesting speculation. I don’t think that’s going to happen in the short term but over time these groups have enormous cash flows and they’re looking for competent management. They’re also looking for brands such as Mirvac. Mirvac has a superb brand. Who knows, that’s way out in the future.