The European gateway cities of London, Paris, Frankfurt and Berlin could benefit from approximately A$500 million in funds from some of Australia’s largest superannuation funds as they set their sights on overseas real estate.
A joint venture between IFM Investors and Industry Super Property Trust (ISPT), called International Property Funds Management, will see 27 Australian super funds geographically diversify their portfolios from predominantly domestic real estate investment.
Australian super funds – which hold the majority of the population’s compulsory pension contributions – generally allocate around 10 percent of their portfolios to real estate. With increased contributions and an ageing population, it’s an increasingly tricky task in a constrained domestic market to identify investment grade assets, forcing investors to look abroad.
Simon Storry, JLL’s Head of International Investments in Australia, says their renewed interest is driven by a strong Australian dollar (trading at 75 US cents on 16 May), and access to diverse asset classes.
In addition, offshore markets offer liquidity and access to a wider menu of asset classes such as residential multifamily portfolios. “The performance of the domestic market is another consideration,” he said.
Despite two of the largest recent transactions in the Australian market – Quay Quarter and Wynyard Place (both in Sydney) – having involved Australian funds, the opportunity to buy new product is limited.
Aside from the joint venture with IFM Investors and ISPT, the A$130 billion fund AustralianSuper, which owns property assets to the value of A$10 billion, has indicated its appetite for European real estate, with new appointments including former Frontier Advisors chief executive Damian Moloney as its head of European investments, and TH Real Estate as fund manager for its office and retail investments in continental Europe.
AustralianSuper is understood to be looking for large-scale retail, office and mixed-use opportunities in Europe, with a portfolio weighted more towards debt than equity.
Money out, money in
The collective effort to invest abroad comes as institutional investors from overseas also expand their global portfolios into Australia. A third of Australia’s institutional grade commercial real estate is owned by foreign investors.
With Japanese sovereign wealth fund GPIF – the world’s single largest public pension fund – sitting on A$2 trillion of wealth and indicating a move into real estate investment for the first time, and Norwegian pension fund Norges holding US$1 trillion of assets under management, and allocating only two percent of that to real estate so far, there is still ample capital still to come, says Storry.
“Capital will favour Australia’s international cities, where transparency, sustainability credentials, rent escalations and international reputation, are key attractions of the domestic market,” he said.
Currently yields on prime office stock in Sydney are 4.63 percent to 5 percent, and in Melbourne they are 4.75 percent to 5.50 percent, according to JLL’s recent Australian Office Investment Review & Outlook.
In London the prime office yield in the City is approximately 4.25 percent, in Paris it’s 3 percent. Frankfurt has a reported yield of 3.25 percent, while in Berlin the yield is currently 2.9 percent.
International Property Funds Management will formally launch in the third quarter of 2018 and is expected to make its first acquisitions in early 2019. It will be targeting core, income-producing assets both on market and off market, according to chief executive Tony McCormack.
IFM Investors is a major infrastructure fund manager, with a 280-strong investor base and a portfolio valued at US$105 billion.
Fund manager ISPT oversees Australian assets totalling A$15 billion.
Click to read about the key takeaways for property from the recent Australian Budget.