Australian superannuation funds looking to tap offshore real-estate investment opportunities are being frustrated by the high fees foreign managers are charging.
Mercer’s head of real estate, Padraig Brown, said local management fees are generally lower than in other markets around the world and that has stopped many of his clients from investing globally.
“Clearly, the asset owners are trying to get their average fee as low as practically possible and properties and private markets are expensive,” Brown told delegates at Investment Magazine’s Infrastructure and Real Estate Conference. “Since property drives the largest allocation in private markets, getting that fee down is crucial.”
These fees can be negotiable but US and UK investors are used to paying higher fees, so managers who have successfully raised equity are not going to discount fees for an Aussie client who is used to better rates.
Nevertheless, real-estate specialist Brown can see foreign managers becoming more flexible with fee terms in the future, to attract Australian capital. He pointed out, too, that co-investment projects had worked well and bring the fees down.
During the conference session, Brown took issue with the notion that Aussie funds should always diversify into offshore real-estate markets.
From a total-portfolio perspective, he went on to say, if funds are well diversified in their equities and bonds, they don’t need to have a perfectly diversified real-estate portfolio.
Rather, they should be focused on the diversification of their income stream within their entire portfolio.
“You have to understand the cash flows in the real-estate portfolio and where they come from – diversification of covenants, diversification of the types of industries tenants are involved in and, from a resilience point of view, geographic diversification.”
Asked whether debt funding was the best investment approach, given the full valuations, Brown warned that opportunities might be missed if the deployment of debt took too long.
Over the last couple of years, leading up to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the audience heard, the major banks have been pulling back from some forms of real-estate lending.
“That’s left quite a gap for private debt investors to step into. That said, the banks are still very active in lending to high-quality assets, high-quality tenants and high-quality owners, so we really haven’t seen a huge investable opportunity into private debt yet.
“While the thematic has been attractive, money has been sitting on the sidelines waiting to be deployed into assets. It’s a big drag on return if you have money sitting on cash or committed to a debt strategy that is not actually invested.”
The real-estate specialist pointed to the high returns generated from private equity but asked how long that money had been sitting there waiting to be drawn.