Property: the search is on
Souurcing property in Australia for trusts is becoming harder as the larger superannuation funds become very active players.
Although superannuation funds have always been a buyer of property in the past, Money Management understands they have become more aggressive in winning the deal.
Three property fund managers have told Money Management they have been outbid on property by superannuation funds with prices paid that wouldn’t stack up for a fund manager.
The reasoning behind this difference in what a fund manager will pay for property and what the superannuation fund actually pays is down to timeframe.
The fund manager needs property to perform almost from day one of acquisition, otherwise it will affect the returns of the fund.
However, the superannuation fund can take a long-term view, and over a period of 15 to 20 years the property will increase in value and bring benefits to members.
Knight Frank chief executive David Woolford says the weight of money in superannuation funds is a factor in the pricing of major property asset sales.
“We are often finding a superannuation fund or wholesale fund are purchasers of prime central business district assets,” he says.
“The superannuation fund is taking the long-term view for these assets rather than the short-term view of the fund mangers.”
APN Funds Management executive director Howard Brenchley says he is aware of the property fund management industry coming off second best to superannuation funds when sourcing assets.
“We have not been directly affected by a superannuation fund outbidding us, but we do know this has happened in the industry,” he says.
“Their investment criteria are different to a LPT [listed property trust], which is focused on buying property at yields to generate income and returns very quickly.
“Superannuation funds talk about absolute returns and expect high growth.”
MacarthurCook head of property Chris Calvert says the fund manager has to be more creative when sourcing property, as it has lost out twice to superannuation funds when buying assets.
“It is hard to get property for our funds, but you have got to be creative. Having said that, however, I am also a conservative purchaser,” he says.
“I would always rather put the real story about a property to our board when seeking approval to go ahead on an acquisition.”
Calvert cites an example recently where MacarthurCook bought an office block in North Sydney.
“We acquired a North Sydney office building with an attractive yield, and the deal included a key lease expiry agreement provided by the vendor,” he says.
“The vacancy rate in the building went from 14 per cent when we bought it to 8 per cent.
“And we saw the letting incentives fall from 35 per cent to a low 20 per cent.”
Calvert says buying assets that have a softening yield or properties that require refurbishing means the fund manager is buying better assets for growth.
“You are buying when there is upside in a property and it is a risk worth taking,” he says.
“You only buy assets when the full story is good and the opportunities are there to turn the building around.”
Superannuation funds have tended to chase the top end of the market because of the large amount of funds they have to invest.
While this puts them into competition with the large property trusts, it does create opportunities for small players such as MacarthurCook.
“There is agreement that there is not enough property to buy in the market,” Calvert says.
“However, a lot of trusts don’t want to be driven away from the blue-chip properties they normally buy.
“But if you look around, there are still appropriate properties to be found for people like us.”
Because the superannuation funds are looking for major assets, smaller players can search around the mid-sized property market for good assets.
“Superannuation funds are buying larger assets at strong prices as they take a long-term view,” he says.
“They are not approaching property with the same attention we do.”
However, another source of property for the smaller managers is from the larger trusts.
A property the larger trusts bought in their early days may no longer fit in the portfolio and is too much trouble to manage, so it is on-sold.
Calvert says MacarthurCook has acquired a few properties this way.
“A lot of trusts are struggling to find properties that will put value into their portfolios,” he says.
“There is a flow down from the bigger trusts that find properties valued between $20 to 30 million too small to handle.
“They are also offloading non-core assets, which are now seen as too small. We picked up a Sydney industrial building from Macquarie Goodman this way.”
Calvert says this is part of the value-add side of the business where a smaller manager can still get some good capital growth out of properties.
“You have to be confident buying counter-cyclical investments before the upside,” he says.
“These properties won’t come knocking on your door, but real estate agents know our requirements and serve us well.”
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