Alternative Investment

Multibillion-dollar wall of private capital tilts toward property

With the property sector particularly sensitive to the price of money, real estate investment trusts led last week’s sell-off, with the sector dropping 4.2 per cent in one day.

Commentary on Friday by Reserve Bank governor Philip Lowe has also raised expectations that the local market should prepare for another 0.5 percentage points rate increase next month.

The punishment on the market of listed property platforms stands in contrast to the mounting firepower of private capital, both through private equity and local super funds.

Control of assets

So large is the potential investment in real estate – assuming the allocation rate remains consistent as the sector grows to a forecast $10.5 trillion by 2040 – that Australia’s super funds will need to go into offshore property markets as well, according to Mr Scasserra.

The weight of money could also be captured by an expansion of so-called alternative asset classes in real estate, such as build-to-rent, land lease healthcare, student accommodation and hotels. The build-up in capital could also push super funds into more corporate action in the public markets to get control of assets, Mr Scasserra says.

Super funds have shown their appetite for real assets through several blockbuster moves in the public market, such as the Sydney Airport takeover this year or KKR’s so-far-unsuccessful tilt at Ramsay Health Care.

But Bevan Towning, head of property at the country’s largest superannuation fund, AustralianSuper, does not expect funds to rush into the direct market for commercial property until it experiences a correction similar to that which has hit listed property.

“There’s no doubt there is a wall of capital coming, but it won’t necessarily go to real estate,” Mr Towning told The Australian Financial Review.

“There’ll be many places to deploy capital, and it won’t just be real estate. It will be in other sectors as well.

“I don’t think the property sector is appropriately priced at this point in time. It’s got a way to go. There’ll be a point where property probably will be a good place to invest, but I don’t see that any time soon. I don’t think the direct market has yet seen the correction.”

While that is a broad view of the commercial property market, AustralianSuper is still busy deploying capital in specific sectors within real estate, such as logistics, Mr Towning said.

Australian listed property has plunged about 24 per cent so far this year, substantially underperforming the broader market and sending individual stocks well below their net tangible asset values.

“It would be naive for the direct market to not pay heed to what the public markets are saying about it,” Mr Towning said. “It would be naive to think that the public markets got it wrong because I don’t think they have.”

The public markets decided where they saw the real estate sector globally, and it was not just confined to Australia, he said. Listed property stocks were trading at big discounts to net assets.

“That [discounting] hasn’t yet caught up with the direct market. That’s because we’re not seeing physical transactions that underwrite valuations. There’s some reality that needs to come into the sector, which hasn’t happened yet.”

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