In our forthcoming piece on Australian REITs we shall be looking at the key role played by the country’s pension funds in property investment. Unlike UK staff superannuation sector where pensions seem to be on track for death by a thousand cuts, Australia pension funds are riding high on the back of an increase in statutory contribution levels in 2002. The result is that Australia has a lot of investable cash looking for good returns and given the limited size of the country’s real estate market, it is not surprising that a lot of this money is going overseas.
The figures are impressive with US$ 7.7bn invested in US property so far this year. This compares to a total of $ 5.5bn invested by Australia in US real estate in the whole of 2006 and gives Australia some 43% of total inward investment into US real estate for 2007 to-date. The reasons that the US is so much in favour are, according to Mark Baillie of Macquarie Bank, a liquid market, good governance and a relatively benign tax regime when it comes to repatriating profits and income.
Given the problems in US residential property and the promises of more woe to come from respected commentators, Australian interest in US real estate seems surprising. The Daily Reckoning says that this trend is happening on the verge of ‘mega consumer bust’. However, the involvement of experienced, successful operations like Macquarie should give one pause for thought. The new Australian money is not direct investments by gullible private investors; Macquarie have excellent form when it comes to investing in the United States as do other Australian players such as Westfield, the world’s leading retail property group. They see themselves in the (commercial) real estate market for the long term.
One continuing advantage the Australians are factoring into their investments is the current high value of the Australian dollar relative to the US dollar. Not surprisingly, they are hedging against further big falls in the US currency but, given that the investments are generally long term, Australian finance probably believes it can ride out a downturn in the US and still take a profit when the US dollar recovers.
Australian investment in US real estate has been characterised by a willingness to pay above average prices in order to acquire superior quality portfolios and a tendency to avoid high profile/prestige/landmark properties. Australian real estate investors are concentrating on areas where they are among the best informed; in the case of Westfield they are not just investing but developing too. Westfield annual and quarterly reports contain a lot of hard data about just how well their markets including the US are doing. Centro Properties, another specialist in retail real estate investments, concentrates on property management but has a policy of investing in non-discretionary retail.
To the middle of 2006, Australia’s retail property investments represented 70% of the total Australian commitment to North American real estate with office and industrial investment taking 17% and 12% respectively (read pdf report here). Average returns from North American investments were 20% a year ago compared to the 13% achieved by investments within Australia. Yields are down this year with Centro getting a yield of just 5.6% when it acquired New Plan Excel Realty Trust for $6.2 billion in April