End of an era as Funds SA sells last direct property

South Australian government superannuation fund Funds SA has sold its last direct property investment, spelling the end of an era for the fund which once had up to 30 per cent in direct property.

The building – the Australian Tax Office building in Hobart – sold for less than $15 million, an almost negligible sum for the $14 billion fund. After almost 15 years, a long-term lease with the ATO expired in September at which point the fund decided to sell the building. Funds SA chief executive Richard Smith said it had been a good investment over the years with a solid income, and the sale had hit its target return. It was sold to an investor whom Smith declined to name. The fund shed the majority of its direct property investment at the end of the 1990s, but in the late 1980s had up to 30 per cent of its investment portfolio in direct property. Smith did not regard the Hobart building as a purely direct property investment, but more of a structured transaction, bond-like in nature, because of its long-term lease to a Commonwealth government tenant. “Its risk profile was somewhat less than an average property investment,” he said. “It was a property transaction that we did in the early 90s to provide a home for the tax office in Hobart. The financial arrangements of the transaction really revolved around there being a long-term lease to a secure government tenant.” Meanwhile, NSW-based Energy Industries Superannuation Scheme also sold its last direct property investment last week, Macquarie Tower in Sydney suburb Parramatta, for $65 million to Investa Diversified Office Fund. Three weeks ago EISS sold three other properties – an office building and two industrial estates in Sydney – to Black Rock Investment Management for $160 million. EISS said it intends to reinvest the $225 million of its $3 billion fund to local and global listed and unlisted property trusts. The shift will provide greater liquidity, lower risk and more certainty of income, according to EISS chair David Croft. Smith agreed risk was a predominant factor for direct property falling out of favour with super funds. “I think you realise there is too much specific risk in a directly held property portfolio,” he said. “If you want to achieve good diversification across the nation you need quite a large portfolio to make sure you’re exposed to all the sub-markets within the Australian property market.” Maintaining property assets directly also took a lot of time and effort, he said. Funds SA’s $1.5 billion property portfolio is split 70/30 between listed and unlisted property. The unlisted exposure is entirely domestic, while the listed property is roughly 64 per cent domestic and 36 per cent global.