Super funds chase higher yielding property

INVESTMENT in direct property by sovereign and superannuation funds is likely to increase in year ahead as managers chase higher-yielding returns.

By InvestSMART · 8 Nov 2012

By InvestSMART ·
8 Nov 2012

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INVESTMENT in direct property by sovereign and superannuation funds is likely to increase in year ahead as managers chase higher-yielding returns.

While some pension funds may have real estate allocations as high as 15 to 20 per cent, property allocations in most countries remain below 10 per cent on average.

The most recent deal was by the Canada Pension Plan Investment Board in the $1.4 billion shopping centre joint venture with AMP Capital and Westfield.

The head of research and consulting services for Knight Frank, Matt Whitby, said total superannuation assets in Australia increased by about $50 billion in the to June 30, with the rate of savings to receive a boost from the increase in compulsory contributions.

"With the allocation to property anticipated to rise above 10 per cent by 2014, there is significant scope for superannuation funds to boost exposure levels to real estate," Mr Whitby said.

The head of capital transactions, NSW at Knight Frank, James Parry, said the investment market had structurally changed from a debt driven market to equity, demonstrated by the buoyant and increasingly cross-border investment activities of the Canadian and Asian pension and sovereign wealth funds, as well as the large local super funds.

"Property yields in most global markets continue to offer a significant premium over government bonds.

"In addition, property offers relative stability of income against the current backdrop of low interest rates and unpredictable inflation," Mr Parry said.

A new survey by CBRE shows that prime office rental growth was strong in Perth but flatter along the eastern seaboard. The national average growth rate was 3.9 per cent, with Perth at 13 per cent, Sydney at 3.2 per cent, Melbourne 3.4 per cent and Brisbane at minus 0.1 per cent.

In the Australian Office MarketView report for the third quarter the head of research at CBRE, Stephen McNabb, said signals were mixed and momentum remained subdued.

He forecast that prime office rental growth would soften over the next 12 months with Perth remaining the growth engine.

In contrast, the head of industrial at Jones Lang LaSalle, Michael Fenton, said the slowdown in construction has led to a tightening of forward supply of warehouses at a time when demand is rising for distribution centres.

"This may lead to a fresh wave of pre-lease and design-and-construct commitments from businesses needing to meet organic growth requirements, or seeking to drive efficiencies by vacating obsolete industrial space," he said.

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Frequently Asked Questions about this Article…

Why are sovereign and superannuation funds increasing direct property investment?

The article says funds are chasing higher-yielding returns. Property yields in many global markets still offer a significant premium over government bonds, and real estate can provide relative stability of income in a low interest rate, unpredictable inflation environment — reasons cited by industry experts in the piece.

How much of their portfolios do super funds typically allocate to property, and could that allocation rise?

According to the article, some pension funds have real estate allocations as high as 15–20%, but property allocations in most countries remain below 10% on average. Knight Frank’s head of research suggested allocations could rise above 10% by 2014, indicating scope for increased exposure to real estate.

What recent major property deal illustrates pension funds' interest in shopping centres?

The article highlights a $1.4 billion shopping centre joint venture involving the Canada Pension Plan Investment Board alongside AMP Capital and Westfield as a recent example of large-scale pension fund activity in property.

Have Australian superannuation assets grown recently, and what is driving that growth?

Yes — Knight Frank’s head of research noted total Australian superannuation assets increased by about $50 billion to June 30. The article says the rate of savings is expected to get a boost from an increase in compulsory contributions.

What are the current office rental growth trends across Australian cities?

A CBRE survey cited in the article reports a national average prime office rental growth of 3.9%. Perth led at 13%, Sydney was 3.2%, Melbourne 3.4%, and Brisbane showed minus 0.1%. CBRE’s head of research described signals as mixed and momentum as subdued, forecasting softer prime rental growth over the next 12 months with Perth remaining the growth engine.

What's happening in the industrial and warehouse property market?

Jones Lang LaSalle’s head of industrial said a slowdown in construction has tightened forward supply of warehouses while demand for distribution centres is rising. That imbalance may prompt a fresh wave of pre‑lease and design‑and‑construct commitments from businesses needing new or more efficient industrial space.

Are property markets shifting from debt-driven to equity-driven investment, and why does that matter?

The article notes a structural change from debt‑driven markets to equity, driven by buoyant cross‑border investment from Canadian and Asian pension and sovereign wealth funds as well as large local super funds. This shift signals stronger direct investment activity and different capital dynamics in property markets.

What are the key benefits of property investment compared with government bonds right now?

Industry commentators in the article say property continues to offer a meaningful yield premium over government bonds and provides relatively stable income, which is attractive in the current context of low interest rates and uncertain inflation.