It is critical as part of the investment decision-
making process to have good knowledge of the property market. Often there is a contrast, with well-documented risk, return and liquidity information to commonly less-than-accurate knowledge of the actual property investment market size.
This puts the property investment community at a distinct disadvantage compared with the better-informed alternative bond and equity asset classes.
In the past, these property investment inefficiencies have restricted many cross-border transactions to forays into another country’s property markets by predominantly cyclical entrepreneurial investors. On sustained capital market growth, new global institutional investors have embraced investment strategies based on diversification.
An allocation base favoured by large global
institutions is to use the property market size as the platform to an international property investment strategy.
Knowing the size of the property market can also be a valuable tool to: estimate the value of future sources of property for institutional investors;
measure the national wealth and property’s role within it; and assist in advocacy programmes by industry bodies.
Sizing the Australian property investment market is a challenging task, as some property sectors and building grade definitions are unclear.
The relationship of core and non-core investment property can be based on Roulac (2003) corporate real estate research, which suggests that 40% of aggregated corporate real estate is in core business real estate and would be appropriate for institutional investors.
The Australian investment market value can also be assessed by examining property owned by institutions. For the past four years, Property Investment Research (PIR) has published its annual Australian Property Funds Industry Survey, which provides the most detailed information on Australian property funds under management. Table 1 provides a summary of the PIR (2004) survey of property investment vehicles.
The table illustrates the composition of the Australian property fund industry. Generally, as property securities funds and mortgage funds/schemes are financial property instruments and are backed by the underlying property investment, the total property assets are in the region of AU$160bn (e99.47bn). On itemising and omitting both the overseas owned properties and development/residential properties, the core and non-core property sectors can be revealed. As there is limited publicly available information on unlisted diversified property funds, the allocation to the property sectors is based on the aggregated major diversified Listed Property Trusts distribution (less the overseas and property development allocations).
On available data, the estimated size of the Australian property investment market is AU$354 bn, with core and non-core property sectors in the region of AU$170bn and AU$184bn respectively. The institutions directly own approximately AU$124bn of Australian investment grade property, and account for more than 90% of the retail investment market compared with less than 40% for the industrial property market. The contrast in the level of institutional ownership between core and non-core property is considerable, with institutions allocating less than 6% to non-core property.
For the year to December 2004, the Australian property investment market grew by 7%, with a long-term 10-year annual growth rate of around 6%.
This approach has created considerable interest, as the size of the global property investment market is now a relatively straightforward calculation. The most recent report by Liang and Gordon (2003), calculated on 2002 GDP values, estimated a global property investment universe of US$12,479bn. Allowing for two years of world growth, the Australian property investment market represents approximately 2% of the global property investment market.
At December 2004, the Australian core property investment market was valued at AU$170bn and by sector represents: office, 39%; retail, 38%; and industrial, 23%. By comparison, the industrial property sector occupies the most space, with 54% of the core property sector floor area.
The recorded AU$170bn core Australian property market represents approximately 48% of the
GDP-based AU$354bn Australian property investment universe. This appears slightly high compared with the US estimated 40% market coverage (Roulac 2003). A case could be made that the Australian property investment market is more mature and defined in concentrated locations. This would equate to better property data market coverage.
PIR’s research illustrates the significant institutional ownership of the core Australian property
sector. Of the AU$116bn, institutions ownership comprises: office, 37%; retail, 50%; and industrial, 13%. The AU$8bn of non-core property owned by institutions is relatively low, less then 6% of the recorded institutional ownership of Australian property.
In subdividing the Australian property owned by institutions into core and non-core sectors, the overseas components represented AU$27bn, being approximately 17% of Australian institutionally owned property. Similarly, about AU$7bn (5%) of Australian institutionally owned property is allocated to property development and residential projects.
The institutionally owned property represents about 35% of the estimated Australian property investment market. This scaling factor of just below three times agrees with the overseas benchmarks (Henderson Investors 2000).
The institutional AU$116bn exposure to the core property sector is dominated by the retail sector, suggesting growth opportunities would centre more on retail transactions between institutions. Alternatively, for institutional investors, a major source of future industrial property investment would be from non-institutional investors, for example corporate-owned property.
The Australian property ownership structure can be compared to the recent expansion of the Australian property investment industry. Since the first PIR
Australian Property Funds Industry survey in 2000, total funds under management have grown on average by 20% annually, in contrast to the previously detailed annual 6% growth of the Australian property investment market. As the invested property market expands, leading institutional investors have continued to look for new opportunities and have increasingly bought core sector property outside Australia.
The contrast in the level of institutional ownership between core and non-core property is considerable, with institutions allocating less than 6% to non-core property. Limited institutional investment may relate less to the opportunities and more to the property industry understanding of the ownership structures and appraisal techniques for alternative property asset classes. New research in identifying and reporting on non-core property could provide a platform for increased investment in alternative property sectors.
The challenge for the Australian institutional investors is to proactively source properties that may be held by passive owners. In addition, the property finance characteristics may need to be restructured to meet capital market demands. On acceptance, non-core property asset sectors will increasingly form part of institutional property portfolios.
Dr David Higgins is a lecturer in property studies in the Faculty of Design, Architecture and Building at the University of Technology, Sydney
Property industry's champion
The Property Council of Australia is the main advocacy group for the property industry. Its mission is to champion the interests of the property sector across all disciplines.
Nearly 2,000 companies are members of the council. Membership ranges from every leading institutional investor, pension fund, property trust and financial organisation to private investors and developers. Asset managers, the professions and trade suppliers actively participate in the association.
Chief executive of the PCA, Peter Verwer, says: “Our principal service to members is to champion their interests in the political arena.”
The major areas of focus are:
Tax – to eliminate stamp duties and all hidden levies and charges, reform land tax, expand CGT relief, improve the GST framework and work toward better international tax rules;
Planning strategy, development and building controls –- to foster a new development system that delivers fewer delays and provides more certainty and consistency across the country;
Urban policy and economic growth – cities strategies that translate into stronger demand for property investment products;
Environment – a framework for sustainable development that recognises the role and interests of the property sector;
Lease legislation – a rational regulatory framework to govern the relationship between lessors and lessees.
With a constantly evolving strategy aimed at reflecting the diverse interests of its members, the PCA has recently announced the formation of a new strategic plan to focus on issues within the capital markets sector. The sector is a strong component of the industry. In announcing the formation of this dedicated section of the PCA, Peter Verwer said that membership is agreed the PCA should retain advocacy as its central role for the industry. The new strategic plan involves “working on engaging to get results, not to leave it up to the bureaucrats”.
The move to globalise property portfolios is proceeding apace, with Australian investors being among the largest investing in Japan, Europe and North America.
The new president of the PCA, Victor Hoog Antink of DB RREEF believes the industry is in good shape and that demand for property in its various forms will remain strong, as institutional asset allocation increasingly reflects real estate as part of the mainstream. The challenge for the capital markets industry is in serving the market with product. “If we don’t manage the expansion internationally, the allocation to property will come down because we don’t have the product. This has to be one of the key focus areas for the industry.”