Some great ideas take time to take hold. Just look at bottled water: the concept of selling it was once considered laughable madness. Who’s laughing now? In Australia, residential property doesn’t feature in any superannuation fund’s investment portfolios and you’d be hard-pressed to find a fund that would admit it is even on their investment radar. But as CATHERINE JAMES reports, the signs are that this is changing.
A half-day conference for institutional investors hosted by Australian residential equity mortgage provider, Rismark International, in Melbourne last month had around 50 to 60 people in tow. It would probably not have drawn even a quarter of that figure a few years ago.
So people are interested, although as yet, no one is buying. However, word among direct property managers and purveyors of ‘shared equity’ products is that the so-called largest asset class in Australia is slowly gaining traction in the minds of the instos. They seem to be holding their breath for the first super fund to jump into the lesser-known waters, knowing that once that is done, other funds will follow.
It is quite likely they won’t be holding their breath much longer. Rismark managing director Christopher Joye says he is confident of raising “non-trivial” amounts of money in the next 12 to 18 months. Another shared equity fund manager, Greenway Capital, confirms it has also noticed an increase in interested parties. But with the property market in dire straits – listed property values are diving and some pundits are saying it’s only a matter of time before unlisted valuations catch up – as well as the more complicated nature of residential property portfolios over their commercial, retail or industrial peers, it’s a tough sell.
And when it comes to selling the product, few have a tougher gig than shared equity fund managers. They are fighting a war on two fronts. They have to convince institutional investors of the merits of exposure to capital appreciation in residential property, and they have to persuade mums and dads it’s a sound alternative to the traditional mortgage structure.
There are many different types of shared equity products. At the Rismark conference, questions from the audience, mainly institutional investors, were dominated by how the product operates at the mum and dad level. Of course, this is because to some extent the homeowners who use a shared equity mortgage are co-investors. And if not regarded as co-investors, then at least their demographics and the process used to select them would still be part of assessing the underlying assets’ value and pricing the risks.
Rismark and Greenway Capital have filters to select who can access an equity finance mortgage. There is criteria around age, credit quality, property values and locations, rules around whether the house is to be owner-occupied or an investment property, borrowing limits, loan span, loans distribution differences (in Rismark’s case loans are sold through Adelaide Bank and in Greenway’s it will be distributed through financial planners), and the list goes on.
Such nuances will impact on the risk and return profile proffered by the fund manager. For example, Rismark won’t lend to anyone over 65 years of age and the current average age for its users to date (funded by Bendigo Bank) is around 40 years of age while Greenway Capital says it won’t lend to anyone under 35 years of age and there is no upper limit.
An external third-party researcher from asset consultant Mercer, David Q. Lee, has been looking at the residential property asset class for some time now, but he still claims it’s one of the most complicated areas he’s ever researched. “It’s a simple idea but eventually it starts to become very complicated when you get down to the product,” he says.
Lee, a private equity pioneer in Australia who is no stranger to complexity, also presented at the Rismark conference with a strong message for the insto audience. He described the evolution of the sector to the insto investment level as a transforming event in Australian capital markets, such that we haven’t seen the likes of in 15 years. However, the sector has suffered from “less than fully informed debate”. Anything with the word “mortgage” in it has been smeared with some of the mud falling out from the sub-prime mortgage woes in the United States, Lee said.
Super fund investors later contacted by Investment & Technology appear to agree with this conclusion. Some said they wouldn’t look at residential property for the very reason that “mortgage” had become a dirty word, and they weren’t prepared to look at it while it remained – rightly or wrongly – the perceived cause of global markets distress.
Leo de Bever, the outgoing Victorian Funds Management Corporation chief investment officer, suggests the asset is avoided in some cases simply because of the public relations implications. “[VFMC] haven’t invested in it, in part because no good deed goes unpunished,” he says. “It’s a perfectly fine asset class. But most super funds I know of in North America [where residential property makes up around 10 per cent of the investable property market] stay away from it purely from a PR point of view. “If you’re caught holding it at a bad time, especially now, it’s very hard to explain. It’s too complicated, and you know what they say about being in complicated structures.”
However, Lee’s address at the Rismark conference would suggest such reasoning is clouding the real issue – that residential property can actually be a good investment. Lee highlighted a number of factors pointing to an expected property boom, backed up by another conference presentation where ANZ senior housing economist Paul Braddick measured, graphed and demonstrated his prediction the market was headed for “the mother of all housing booms”. Lee also pointed to the strong history of property performance and the low volatility in this asset class. Not to mention the gaping capacity to take on institutional money – the asset class is already estimated to have a capital value of around $3.2 trillion in Australia. “From a long term balanced perspective it should be a very serious consideration for long term investors,” Lee said.
“The impact of building up long term assets in this area is going to be quite profound.” “There are a range of factors underpinning its stability and growth. You’d be hard pressed to find as many [factors] in some of the other traditional asset classes.” Whether any super funds pay attention to Lee’s arguments is hard to guess. He is a bit of an anomaly among the asset consultants when it comes to residential property.
According to one funds manager, Lee is the only representative among the consultants saying the asset has big benefits. Lee says consultants and investors are dragging their feet on taking a more serious look at this asset through the shared equity structure. “It’s a slow and frustrating process but that’s the process we follow. You can’t rush institutional investors – it’s not sensible to do that under any circumstances.”
Like Rismark and Greenway Capital, Lee is hopeful the sector will grow. And no doubt, he too is holding his breath waiting for the first super fund to make the jump.
