Allocations by the super funds to the property sector are forecast to grow threefold over the next two decades to $820 billion, a wall of money that could fuel the development of alternative assets such as rental housing and healthcare or spark a fresh round of takeovers, according to Credit Suisse.
Also, about $66 billion is sitting offshore in dry powder already raised for non-listed private real estate in the Asia-Pacific region, and another $58 billion is in the process of being raised.
Billions of dollars in “dry powder” private equity have been raised for commercial real estate. James Brickwood
Factoring in leverage, that capital could generate about $250 billion in purchasing power, with Australia shaping up as an attractive market in the region.
The above analysis of the extent of private capital waiting in the wings will be presented at the Financial Review Property Summit on Monday by Credit Suisse Australia’s co-head of investment banking, Angelo Scasserra.
It comes just days after another sharemarket rout, sparked by US inflation figures and growing expectation of a sharper increase in US rates.
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.
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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