Australian superannuation (pension) funds have once again come under scrutiny over their asset allocation strategies – namely their high exposure to equities in preference to fixed income assets. The super fund industry has national funds under management in excess of $1.3 trillion with a 53% allocation towards equities (domestic and foreign) and only 16% towards fixed interest. There are underlying reasons for the overweight equity allocation, in part due to the lack of depth to the domestic fixed interest market. Commonwealth Government Securities (CGS) on issue total just $237 billion and the corporate bond market is small by international standard. Furthermore, prevailing market conditions have driven down yields on CGS to record lows (eg. 3.63% on 5 year bonds) which are well below the return requirement of most funds.
Whilst commercial real estate is only a small sector when compared to equities and fixed income, there is a growing argument towards a higher exposure for superannuation funds that has not been given any light in the recent debate. Recent data from Association of Superannuation Funds of Australia shows the allocation towards direct real estate was 7% (domestic and foreign) and a further 3% in listed property. However an analysis by Jones Lang LaSalle shows divergent preferences for direct property across the different types of superfunds.
The major classifications of Australian superfunds are as followed:
- - Corporate : employer stand-alone fund where company owners manage the fund on behalf of employees.
- - Industry : not-for-profit funds run by industry associations on behalf of the benefit members.
- - Public Sector : state and commonwealth government managed funds
- - Retail : usually managed by banks and investment companies and have open memberships
The following table shows the direct property allocation of superannuation funds by their classification, highlighting a clear preference for direct property from industry superfunds relative to the retail superfunds.
Unsurprisingly, the funds without any exposure to direct property were mostly smaller funds with larger liquidity requirements. Other factors determining the liquidity requirements of superfunds include the average age of participating members as well as the net cash flows. In the existing market, however, volatility has been the cost of liquidity. As direct property is a stable long-term hold, the investment horizon of property suitably matches many large superfunds that are being run as a going concern. As a result, there is clearly scope for further exposure form a number of larger retail superfunds towards direct property.
Another area that super funds could look to move on is the debt funding side of institutional property investment. The long-term investment horizon of direct property has not been matched in the existing capital markets with major banks usually offering maximum debt facilities of up to 5 years. With a similar long-term view, superfunds could play a larger role in the debt funding of direct property with longer maturity profiles. This style of debt funding could provide a stable fixed-income asset, or could be used on a floating rate basis to reduce interest rate risk held by funds other fixed income securities.
About the author
Nicholas Wilson is a Research Analyst for Jones Lang LaSalle, based in Melbourne, Australia.