Australian super funds and Canadian pensions funds eyeing property investments

A new wave of investment into the global property sector from Australian super funds and Canadian pension funds is expected, according to consultants Knight Frank.

The property allocations of the Australian and Canadian pension funds are expected to exceed 10% in the next one to two years, the firm predicts.

Assets under management total A$1.4 trillion and C$1 trillion respectively and large equity investors will continue to dominate the landscape as demographic and legislative changes to drive growth in international investment by pension funds.

With debt finance likely to remain constrained for the foreseeable future, Knight Frank’s latest report on global real estate investment released at its Global Capital Markets conference in Shanghai, is predicting that the larger equity players, notably sovereign wealth funds and pension funds, particularly Australian and Canadian pension funds will dominate.

In particular, the Australian superannuation funds are expected to substantially increase their investments in core European and North American property markets in the near future. Ageing populations are prompting pension funds generally to invest more in real estate because of the growing reliance on self-funding for retirement.

In Australia’s case, this is also being driven by changes to legislation which will increase employees’ compulsory pension contributions over the next seven or eight years.
A number of Canadian pension funds have already built a strong international presence over the last decade and now have considerable experience in global property markets. This trend is expected to continue as the funds diversify away from their relatively small domestic market. Canadian pension funds’ allocations to property have grown steadily in recent years, rising from 5.2% of total assets in 2000 to 9.4% in 2011.

‘The investment market has structurally changed from a debt driven market to equity, demonstrated by the buoyant, and increasingly cross-border, investment activities of the Canadian and Australian funds and sovereign wealth. The fierce competition for trophy assets is driving these investors to now consider an increasingly diverse range of opportunities,’ said Peter MacColl, head of global capital markets at Knight Frank.

Darren Yates, partner, research, at Knight Frank pointed out that unlike the Canadian pension funds, the Australian superannuation funds have not really ventured much outside their domestic markets. ‘This is now changing, in part driven by legislation which will increase compulsory contributions to pensions, thereby generating huge sums of additional capital for these funds. It could be in the tens of billions, much of which will find its way in to international property in order to source enough stock,’ he explained.

‘Property yields in most global markets continue to offer a significant premium over government bonds. In addition, property offers relative stability of income against the current backdrop of low interest rates and unpredictable inflation,’ he added.