Building a property portfolio for the long haul 

AustralianSuper is one of the world’s largest investors in unlisted assets, investing more than $30 billion in assets like direct property, infrastructure and credit. We use our scale and capabilities to access a broad range of quality assets that have delivered solid long-term returns for members.

In this article, AustralianSuper’s acting head of Property, John Longo talks about the Fund’s direct property strategy, the role it plays in a diversified portfolio and the outlook.  

Why do you invest in direct property rather than listed property?

The longer investment horizon of direct property makes it a particularly attractive asset class for us, given the alignment with our role of funding members’ retirement incomes. Younger members starting out in their working lives can have an investment horizon of around 60 years, so we’re in it for the long haul. 

Property returns comprise an income component from rents and capital growth from increases in valuations. As an unlisted asset, direct property is less liquid than other assets like shares or real estate investment trusts, which can be quickly bought and sold on the securities exchange. Investors receive a return premium as a trade-off for this illiquidity. Historically, unlisted property has delivered higher returns with lower volatility than listed property. 

Property, like other unlisted assets, plays an important role in a diversified portfolio as it can provide steady investment returns across economic cycles without the highs and lows you typically get with listed shares.  

What type of property assets do you invest in and why?

We currently manage more than $10.5 billion in property assets on behalf of members. Our focus is on investing in large, quality assets like shopping centres and office buildings in Australia and international markets that can provide reliable, steady income streams. 

chart showing how investment switch can affect balance

We believe a portfolio which has exposure to high quality, large scale international assets in global gateway cities, coupled with exposure to core Australian commercial property, improves diversification and provides the potential for better long-term returns. As a long-term investor, we also look for opportunities to add value to assets by reinvestment and redevelopment. The King’s Cross redevelopment in London is a prime example of this strategy.

Since 2013, we’ve been expanding our in-house capability and investing more directly. During this time, AustralianSuper members have become part-owners of the Ala Moana Shopping Center in Hawaii, King’s Cross in London, Centre: MK also in the UK, and a portfolio of office buildings in Boston and Washington DC.

How supportive are current economic conditions for the property sector and are there any potential risks on the horizon? 

Continuing economic growth in Australia and the United States is supporting direct property, particularly in the office and industrial sectors in those markets, and multifamily residential properties in the United States.  

Moderating economic conditions in the UK have impacted some property market sectors such as retail, while the office and industrial markets are performing well. The retail property market is being impacted by lower demand for physical retail space from tenants due to the continued growth of e-commerce and changes to how consumer’s shop.

We are mindful of geopolitical risk around the world, which can impact the demand for all types of real estate. Like share markets, property markets can react to government policies on immigration, tax, interest rates, tariffs etc.

There’s been a lot of news coverage about a potential housing market downturn in Australia, with prices already falling. What does this mean for AustralianSuper’s property investments?

We don’t expect the falls in house values to impact the pricing of commercial property sectors. Pricing and valuations of commercial property are determined by investor expectations of future cash flows, and return requirements which are not related to residential property.

What’s the outlook for AustralianSuper’s property portfolio?

AustralianSuper invests in multiple property sectors, either by acquiring properties directly or investing via unlisted funds. The main sectors we invest in are office, retail and industrial with the key geographies being UK, USA and Australia.

The outlook for the office and industrial market is positive, driven mainly by strong tenant demand, controlled supply and relatively high occupancy levels in most markets. Industrial property has experienced strong demand for space due to increasing logistic requirements as a result of increasing consumer consumption and e-commerce sales.

Retail property is being impacted by increasing online retail spending which is affecting retailer profit margins and the demand for retail space. We believe that the largest regional shopping centres are best placed to withstand the effects of online sales.

Property returns move in cycles. Currently, we’re in the mature phase of the growth cycle as values have generally been increasing since the global financial crisis and property rental yields and return expectations are relatively low compared to historical levels. Conditions in local real estate can vary from market to market. For example, if underlying income growth from a property is strong, we can expect values to continue to grow.

Generally, we think property valuations and returns will be more moderate in future years due to the maturing property cycle and rising global interest rates. However, with continued economic growth and supportive interest rates, the majority of markets that we monitor are in a relatively strong supply / demand position and cash flows from well leased properties are relatively secure. As long-term investors, we look at returns across the entire economic cycle as these are what are going to matter the most for members.      

AustralianSuper members can gain exposure to direct property through our PreMixed options or the DIY Property option. We recently announced some changes to the Property option to better manage the liquidity risk for members. Find out more.   

Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.  

 

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