International Super Funds Put Spotlight on Our Hottest Sectors

Superannuation funds are in it for the long haul and have trillions to play with. In fact, the Australian retirement savings pool is one of the largest in the world with total assets of $3.7 trillion—around 140 per cent of annual GDP. With between 30 and 85 per cent of super funds allocated to higher-growth assets such as property and shares, there’s a lot to go round, and that’s not including international pension schemes interested in the Australian property market. Super funds abroad The fact is that to diversify and protect, Australian super funds often look abroad for funding, as they have with Federated Hermes, a US-based investment manager that counts eight of Australia’s top 15 super funds as clients. And where they put their money is illuminating. “Some of the joint ventures and the placemaking projects we have going on are usually larger-scale institutional pension scheme-type investors, and Aussie super funds are a natural fit with those longer-term projects,” London-based Sydneysider and director real estate client solutions at Federated Hermes Selena Ohlsson says. There are also major differences between Aussie super funds and what is called defined contribution pension schemes in the UK. ▲ Director real estate client solutions at Federated Hermes Selena Ohlsson. “In the UK market they are a lot further behind the Australian super fund industry in terms of growth and allocations—after the liquidity crisis [prompted by former UK Prime Minister Liz Truss’s disastrous 2022 ‘minibudget’] —corporate defined benefit schemes were hugely overweight and needed to come out of the sector,” Ohlsson says. “So we’ve seen a fundamental change from that traditional source of capital and there is a bit of an opportunity there [for the likes of Australian super funds]—what’s the next source of capital accessing stock and who is going to invest in the UK?” Australian market observers will notice some similarities in what is piquing the interest of investors into the UK. “A lot of them are looking at build-to-rent and living as a sector from a commercial perspective [that] took off in the UK a little earlier [than Australia],” Ohlsson says. “We’ve been running or creating build-to-rent stock for eight or nine years now on behalf of pension scheme capital, so that is a sector that ’ s growing here, as in the UK, that might be ahead of Australia in terms of how much effort and focus goes there. “They’re also interested in things like student accommodation and lots of subsectors within living are growing spaces.” Super funds in Australia While Federated Hermes might not build property in Australia, super funds both domestic and global certainly do, and international investment in Australia is on the rise. New research from Colliers found that offshore investment from the US into Australia was particularly prevalent, increasing 58 per cent in the year to June, 2024, compared to the same period in 2023—from $1.6 billion to $2.55 billion. ▲ Overall offshore investment totalled $4.5 billion in the half year, up by $1 billion compared to the same time last year, according to Colliers. There were positive signs of a recovery in international interest in Australia, it said. “APAC is a powerhouse of economic activity, offering diverse investment opportunities across traditional sectors such as residential, commercial and industrial and logistics as well as growing specialised sectors like data centres and cold storage,” Colliers managing director of Global Capital Markets, Asia Pacific, Chris Pilgrim says Indeed, this week the Ontario Teachers Pension Plan, alongside investment manager Hines , acquired two build-to-rent assets in Brisbane developed by Arklife—its Cordelia Street project and 28 Robertson Street in Fortitude Valley that was completed in 2021, for a total of 354 units. “With the Australian population expected to see continued growth and consumer preferences in the country moving more towards the rental sector, we see strong, long-term potential in the Australian multi-family market,” Jun Ando, head of Asia-Pacific Real Estate at Ontario Teachers’ Pension Plan, said in a statement. “These assets provide us with a strategic entry point into Brisbane and, working alongside Hines and Arklife, we will look to offer a compelling value proposition for tenants and create value for our stakeholders through active asset management.” ▲ Arklife put its $800-million portfolio of projects on the block last year to raise funds for new development. The intersection between affordable and build-to-rent is a space that super funds are interested in, according to Ohlsson. “What has struck me [here in Australia] is that there has been a lot more focus on affordable housing,” Ohlsson tells The Urban Developer . “Similar to here, in the UK you can build a build-to-rent mixed-use but most councils require a minimum percentage to be affordable, although that can vary based on the council. “Inevitably, super funds are going to be focused on key workers. “Your build-to-rent might be yielding a stronger income return … [and] on affordable that comes down a bit, as the rental underwrites are a lot lower, so the natural partners for that on the affordable side are local governments, and the pension funds associated with that.” Investing for the future The major assets and sectors that super funds are investing in are inevitably divergent, but there are some commonalities, especially in the office sector where—despite return-to-office mandates—consolidation and quality is winning. “The office market has seen a real bifurcation, and it’s not all bad … your grade-A, well-located, top-of-the-range ESG stock, headline rents are still being achieved and they are still performing very well.” Federated Hermes has $2.6 billion of office assets under management, and while we won’t see a full return to pre-Covid levels in office takeup, some markets are benefitting from the office market shift in the UK, which may prove a blueprint for the Australian market. “You’re looking at an asset which has been significantly written down, so there’s an opportunity there to get in and reposition it to become a Grade-A asset, which can drive that sort of rental growth and demand. “A lot of our bigger placemaking projects… not all the stock is just office; we look at living, hotels and amenities needed, and are led by the demand dynamics.” There has been a shift in the UK, Ohlsson says, towards a high-end regional office, with major companies taking entire office buildings in second-tier cities such as Manchester, Leeds and Birmingham, giving staff options outside London. “It’s an interesting time in the market,” she says. “There is a change in the traditional holders of UK commercial property, and that’s an opportunity for Aussie super funds but also other forms of capital. “You build something like that and you ’ re changing the shape of that city and what the regions might be able to attract in terms of jobs. But you have to put the time and the capex in there now.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

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