Demand turns eyes offshore
Prospects for real estate investment are good, to judge from the positive views expressed at the PCA Capital Markets Summit. In Australia, property has become a significant portion of many investors’ portfolios, because of the high level of securitisation (see chart at right). The challenge now is to continue to satisfy the demand, and that means an increasing focus on offshore opportunities. Almost 90% of delegates expected investment offshore to increase significantly.
Approximately 56% of equity raised in Australia in 2004 funded offshore acquisitions, mainly in the US. Now, Australian LPT investors are keen to diversify international exposure to other markets such as Japan and Europe. Delegates were asked in which area they would be investing in the next 12 months. Asia came up top for 37%, Europe 25%, US 20%, Japan 15%.
The global trend also requires the industry to come up with a greater variety of fund options, to cater for greater foreign appetite for Australian assets and an increased allocation by superannuation funds. Simon Jones of Macquarie said, “I think the Australian LPT is one of the cheapest in the world at the moment. But if Australia doesn’t produce better exposure to the sector, it will miss out to the growth of REITs in other countries.”
Kurt Wright of the US firm GMAC gave an idea of how things can develop in Australia. He talked about the $5bn (e4.1bn) deployed in innovative multi-sector strategies in the last two to three years in the US, where the CMBS market is growing at $50bn a year. Around 40 funds have been launched to satisfy demand for mezzanine debt exposure. The use of leverage has increased massively. Wright says, “Five years ago it was taboo but now any lender will give you 70-80% loan to value. You have to be clever sometimes and not take the money.”
His view is the growth sector for international property investors is a variation on the REIT idea. Wright says GMAC’s favourite sector is REIT preferred, offering a high current yield, while conservatively placed within the sector. REIT common, on the other hand, is relatively over-valued (dividend yield is on the low side 5.5%, compared with 7.7% for REIT preferred).
Wright observes that compared with the US, Australia takes a more sophisticated attitude to the property market. “In the US, we take a traditional conservative approach based on type, geography, position in the capital structure (for example, mezzanine) whether it is public/private, debt/equity, core/value-added. In Australia, what you are seeing today is investors defining their objectives in terms of risk and return, cashflow, control, liquidity, duration/time horizon, and call protection.”
Looking at the long-term trends for property investment, JP Morgan’s Tim Church suggested it will be “fairly challenging” for the property sector to deal with the capital flows in the next 25 years. In Australia, as the amounts being invested in superannuation funds grow, the lack of suitable vehicles and available property will be an issue, forcing investors to be more global in outlook.
Simon Jones of Macquarie suggested the ‘permanent wave of capital’ into property is here to stay: “Returns will be lower and selection of assets will become more important. The question is: will Australian capital be able to compete?”
Real estate as an asset class is expected to gather a greater share of the asset allocation pie. But figures produced by Russell suggest the allocation to property will not be changing significantly in the foreseeable future. Overall, the feeling was that if real estate can continue to perform better in real terms than it has over the long term, the market will get the message.
This has been the case in the US, where “investors are taking the opportunity to invest in a much more strategic fashion,” according to Kurt Wright. NCREIF reports a 14.5% average return for pension fund investors in real estate last year. However, Wright views the current level of demand as “unsustainable” with $44bn invested currently in securitised real estate.
Currently, he said, there are two sets of investors: the herd who have been sitting on cash and will now chase declining private equity yields; and opportunistic investors, those who supplement private equity with other synergistic approaches.
Is this, as some suggest, a “permanent re-pricing” of real estate?
Wright was wary of such ‘new paradigm’ thinking: “When treasury rates go back to their long-term trend levels, we may see a back-up in real estate pricing.”
Wright was critical of the poor guidance given by asset consultants who, he says, have been extremely reluctant to put clients into real estate for the last 10 years. Recently, though, they are active again and this, he believes, is a solid bellweather for the asset class.