Australian super funds could play a big part in stabilising our beleaguered listed property sector, by providing REITs with the long-term loans that they currently lack, according to the executive director of AMP Capital Investors’ global listed property joint venture.
Kim Redding said yesterday that Australia’s listed property sector was unlike others such as the US, in that it heavily relied on banks for funding, which resulted in most debt being for terms no longer then three years.
Redding said Australian REITs would benefit from the system of "whole loans" which operates in the US, whereby insurance companies or pension funds worked through intermediaries to provide 10 or 15-year funding on a single building or portfolio of properties – in Redding’s words, "essentially a bond secured by real estate".
Access to such funding allowed REITs to spread out their debt maturities, Redding said, and avoid situations such as that being faced by General Growth Properties which is struggling for viability as $US22 billion of debt comes due over the next four years.
In return, pension funds or insurance companies received a long-term asset which matched their liability profile, beat the cash rate and provided a real-asset hedge against inflation, according to Redding, who in fact started his long career as an intermediary broking such "whole loans".
Redding said it would just be a matter of putting the intermediary infrastructure in place and educating Australian super funds of the potential benefits of commercial mortgage-backed securities, which remains a tiny sector in this country.
Redding said that "failing the collapse of the financial system", REITs currently presented a "once in a lifetime buying opportunity" given they were trading at just 50 per cent of the replacement costs of their underlying buildings (and that is before allowing for further commodity price falls).
He suggested Australian investors placed too much focus on net asset values, and urged them to look at underlying cash flows of REITs, which have remained relatively strong notwithstanding future pressure as unemployment creeps up.