The superannuation industry is a major source of institutional investment capital globally and is emerging as a force in New Zealand capital markets. However, our super fund allocations to commercial real estate are far behind Australia, according to a new report from CBRE Research.
Through KiwiSaver and the New Zealand Super Fund, the local superannuation industry has grown by around $13 billion a year since 2014 to over $160 billion under management, according to CBRE New Zealand’s newly-published Superannuation Fund Asset Allocation Trends report.
However, New Zealand lagged many other countries in establishing its superannuation savings framework and the size of our sector is tiny compared with Australia, where there are $3.7 trillion of superannuation funds under management.
Superannuation funds are invested according to risk/return targets. These inform fund managers’ geographic and sector allocations, including real estate, which can straddle several categories including equities, debt, or direct investment.
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There is significant divergence in how the superannuation industry locally and overseas allocates investment funds under management, says CBRE executive director & head of research Zoltan Moricz.
“Real estate allocations are comparatively low in New Zealand. While the New Zealand Super Fund has increased its allocations in recent years after developing a long-term strategy for real estate investment, very little KiwiSaver investment has been flowing into direct property.”
We also lag Australia, especially in relation to wholesale (unlisted) equity funds and direct real estate investments. KiwiSaver providers’ allocations to direct/unlisted real estate are less than 1% of their total funds under management.
This compares with Australian super fund providers’ overall average direct property allocation of 4.8%. The NZ Super Fund’s investment in unlisted property is higher, at 3.9% of funds invested, but is still materially less than the proportion of Australian super funds that are directly invested in property.
It is also worth noting that property, especially direct investment, plays a substantial role across the spectrum of fund types in Australia, in stark contrast to New Zealand, Moricz says.
“AustralianSuper, the largest Australian superannuation fund with around $300 billion in funds under management, allocates between 7% and 8% of its funds to unlisted property, regardless of fund profile.
"In contrast, KiwiSaver fund allocations to real estate are mainly focused on the higher growth/higher risk end of the fund spectrum, indicating a different approach. Most of this is concentrated in the listed as opposed to unlisted property sector, further emphasising the contrast.”
In AustralianSuper’s view, there are several reasons for favouring direct property investment. Unlike listed assets, unlisted property and infrastructure are less prone to short-term market volatility. They have historically produced better risk-adjusted returns, which contribute to a balanced portfolio.
Unlisted assets and superannuation funds also share a long-term investment outlook, which helps improve the long-term value of unlisted assets.
Given these characteristics, the low level of direct property investment by the KiwiSaver industry appears to be a missed opportunity to optimise funds’ risk/return metrics, says CBRE senior director of capital markets John Holmes.
“It’s natural to ask what is behind the lower allocation to real estate in New Zealand, specifically unlisted and direct investment. There will no doubt be a combination of factors at play here, including technical and management expertise, liquidity and the impact this has on achieving allocations of scale, and investment committees’ views on relative returns,” he says.
“Industry participants we have spoken with often comment that KiwiSaver funds have historically lacked the necessary scale to meaningfully participate in direct investment and achieve asset diversification.
"However, with the roughly $11 billion annual growth in total KiwiSaver funds under management over the past three years and the industry consolidation that is occurring, we believe this may be changing.”
If New Zealand funds follow trends in Australia, it implies the potential for around $8 billion of unlisted real estate investment, growing at around $500 million annually.
If, or when, KiwiSaver providers look to increase their allocations to unlisted and direct real estate, the next question is where and how these funds will be invested. Some of the funds will go offshore, to markets with greater liquidity and to achieve diversification.
The NZ Super Fund’s direct investments are certainly weighted offshore at present and managers will naturally be looking at relative returns available in New Zealand against other geographies, says Holmes.
“New Zealand can expect to benefit from some of this additional investment, which would provide a welcome liquidity boost to the local commercial real estate market. We anticipate some managers will look to establish their own portfolios and management platforms, in addition to the handful that already do so.
"For many, the first step may be to work alongside specialist real estate managers either in direct closed-end co-investment arrangements, or via open-ended funds.”
CBRE Research’s Superannuation Fund Asset Allocation Trends report features more detailed insights and commentary on super fund allocations to real estate, highlighting further trends and opportunities. Visit cbre.co.nz/superfund-real-estate-nz-aus-2024 to read the full report.
- Supplied by CBRE
